Correlation Between Liontown Resources and Caterpillar

Can any of the company-specific risk be diversified away by investing in both Liontown Resources and Caterpillar 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 Liontown Resources and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Liontown Resources Limited and Caterpillar, you can compare the effects of market volatilities on Liontown Resources and Caterpillar 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 Liontown Resources with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Liontown Resources and Caterpillar.

Diversification Opportunities for Liontown Resources and Caterpillar

0.5

Correlation Coefficient

Liontown Resources  Caterpillar

Very weak diversification

The 3 months correlation between Liontown and Caterpillar is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Liontown Resources Limited and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Liontown Resources 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 Liontown Resources Limited are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Liontown Resources i.e., Liontown Resources and Caterpillar go up and down completely randomly.

Pair Corralation between Liontown Resources and Caterpillar

Assuming the 90 days horizon Liontown Resources Limited is expected to under-perform the Caterpillar. In addition to that, Liontown Resources is 2.74 times more volatile than Caterpillar. It trades about -0.1 of its total potential returns per unit of risk. Caterpillar is currently generating about -0.17 per unit of volatility. If you would invest  40,463  in Caterpillar on November 29, 2024 and sell it today you would lose (6,205) from holding Caterpillar or give up 15.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.72%
Values	Daily Returns

Liontown Resources Limited  vs.  Caterpillar

Liontown Resources

Risk-Adjusted Performance

Very Weak

Over the last 90 days Liontown Resources Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

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 weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in March 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Liontown Resources and Caterpillar

The main advantage of trading using opposite Liontown Resources and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Liontown Resources position performs unexpectedly, Caterpillar 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 Caterpillar will offset losses from the drop in Caterpillar's long position.

The idea behind Liontown Resources Limited and Caterpillar 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.