Correlation Between Caterpillar and Rio Tinto

Can any of the company-specific risk be diversified away by investing in both Caterpillar and Rio Tinto at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Caterpillar and Rio Tinto into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Caterpillar and Rio Tinto Group, you can compare the effects of market volatilities on Caterpillar and Rio Tinto and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Caterpillar with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Rio Tinto.

Diversification Opportunities for Caterpillar and Rio Tinto

0.16

Correlation Coefficient

Caterpillar  Rio Tinto

Average diversification

The 3 months correlation between Caterpillar and Rio is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group and Caterpillar is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Caterpillar are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto Group has no effect on the direction of Caterpillar i.e., Caterpillar and Rio Tinto go up and down completely randomly.

Pair Corralation between Caterpillar and Rio Tinto

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Rio Tinto. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.38 times less risky than Rio Tinto. The stock trades about -0.08 of its potential returns per unit of risk. The Rio Tinto Group is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  7,115  in Rio Tinto Group on December 29, 2024 and sell it today you would earn a total of  497.00  from holding Rio Tinto Group or generate 6.99% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Caterpillar  vs.  Rio Tinto Group

Caterpillar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Caterpillar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Rio Tinto Group

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto Group are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Caterpillar and Rio Tinto

The main advantage of trading using opposite Caterpillar and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Rio Tinto can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Rio Tinto will offset losses from the drop in Rio Tinto's long position.

The idea behind Caterpillar and Rio Tinto Group pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.