Correlation Between Caterpillar and WisdomTree Japan

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

By analyzing existing cross correlation between Caterpillar and WisdomTree Japan Hedged, you can compare the effects of market volatilities on Caterpillar and WisdomTree Japan 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 WisdomTree Japan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and WisdomTree Japan.

Diversification Opportunities for Caterpillar and WisdomTree Japan

0.83

Correlation Coefficient

Caterpillar  WisdomTree Japan

Very poor diversification

The 3 months correlation between Caterpillar and WisdomTree is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and WisdomTree Japan Hedged in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree Japan Hedged 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 WisdomTree Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree Japan Hedged has no effect on the direction of Caterpillar i.e., Caterpillar and WisdomTree Japan go up and down completely randomly.

Pair Corralation between Caterpillar and WisdomTree Japan

Considering the 90-day investment horizon Caterpillar is expected to generate 1.37 times more return on investment than WisdomTree Japan. However, Caterpillar is 1.37 times more volatile than WisdomTree Japan Hedged. It trades about 0.1 of its potential returns per unit of risk. WisdomTree Japan Hedged is currently generating about 0.04 per unit of risk. If you would invest  34,716  in Caterpillar on August 23, 2024 and sell it today you would earn a total of  4,243  from holding Caterpillar or generate 12.22% return on investment over 90 days.

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

Caterpillar  vs.  WisdomTree Japan Hedged

Caterpillar

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in December 2024.

WisdomTree Japan Hedged

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree Japan Hedged are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively steady basic indicators, WisdomTree Japan is not utilizing all of its potentials. The new stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with Caterpillar and WisdomTree Japan

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

The idea behind Caterpillar and WisdomTree Japan Hedged 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.