Correlation Between Caterpillar and Glencore PLC

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

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

Diversification Opportunities for Caterpillar and Glencore PLC

0.6

Correlation Coefficient

Caterpillar  Glencore PLC

Poor diversification

The 3 months correlation between Caterpillar and Glencore is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Glencore PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Glencore PLC ADR 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 Glencore PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Glencore PLC ADR has no effect on the direction of Caterpillar i.e., Caterpillar and Glencore PLC go up and down completely randomly.

Pair Corralation between Caterpillar and Glencore PLC

Considering the 90-day investment horizon Caterpillar is expected to generate 1.84 times less return on investment than Glencore PLC. But when comparing it to its historical volatility, Caterpillar is 1.19 times less risky than Glencore PLC. It trades about 0.24 of its potential returns per unit of risk. Glencore PLC ADR is currently generating about 0.38 of returns per unit of risk over similar time horizon. If you would invest  946.00  in Glencore PLC ADR on January 24, 2024 and sell it today you would earn a total of  231.00  from holding Glencore PLC ADR or generate 24.42% return on investment over 90 days.

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

Caterpillar  vs.  Glencore PLC ADR

Caterpillar

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Glencore PLC ADR

Risk-Adjusted Performance

8 of 100

OK

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

Pair Trading with Caterpillar and Glencore PLC

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

The idea behind Caterpillar and Glencore PLC ADR 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.