Correlation Between Crude Oil and Lean Hogs

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

By analyzing existing cross correlation between Crude Oil and Lean Hogs Futures, you can compare the effects of market volatilities on Crude Oil and Lean Hogs 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 Crude Oil with a short position of Lean Hogs. Check out your portfolio center. Please also check ongoing floating volatility patterns of Crude Oil and Lean Hogs.

Diversification Opportunities for Crude Oil and Lean Hogs

0.28

Correlation Coefficient

Crude Oil  Lean Hogs

Modest diversification

The 3 months correlation between Crude and Lean is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Crude Oil and Lean Hogs Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lean Hogs Futures and Crude Oil 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 Crude Oil are associated (or correlated) with Lean Hogs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lean Hogs Futures has no effect on the direction of Crude Oil i.e., Crude Oil and Lean Hogs go up and down completely randomly.

Pair Corralation between Crude Oil and Lean Hogs

Assuming the 90 days horizon Crude Oil is expected to generate 1.42 times less return on investment than Lean Hogs. In addition to that, Crude Oil is 1.45 times more volatile than Lean Hogs Futures. It trades about 0.02 of its total potential returns per unit of risk. Lean Hogs Futures is currently generating about 0.04 per unit of volatility. If you would invest  8,070  in Lean Hogs Futures on September 5, 2024 and sell it today you would earn a total of  255.00  from holding Lean Hogs Futures or generate 3.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.46%
Values	Daily Returns

Crude Oil  vs.  Lean Hogs Futures

Crude Oil

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Crude Oil are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Crude Oil is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Lean Hogs Futures

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Lean Hogs Futures are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Lean Hogs is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Crude Oil and Lean Hogs

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

The idea behind Crude Oil and Lean Hogs Futures 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.