Correlation Between ProShares UltraShort and ARCA Oil

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

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

Diversification Opportunities for ProShares UltraShort and ARCA Oil

-0.42

Correlation Coefficient

ProShares UltraShort  ARCA Oil

Very good diversification

The 3 months correlation between ProShares and ARCA is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding ProShares UltraShort MSCI and ARCA Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Oil and ProShares UltraShort 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 ProShares UltraShort MSCI are associated (or correlated) with ARCA Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Oil has no effect on the direction of ProShares UltraShort i.e., ProShares UltraShort and ARCA Oil go up and down completely randomly.

Pair Corralation between ProShares UltraShort and ARCA Oil

Considering the 90-day investment horizon ProShares UltraShort MSCI is expected to generate 1.22 times more return on investment than ARCA Oil. However, ProShares UltraShort is 1.22 times more volatile than ARCA Oil. It trades about 0.14 of its potential returns per unit of risk. ARCA Oil is currently generating about -0.47 per unit of risk. If you would invest  1,519  in ProShares UltraShort MSCI on September 29, 2024 and sell it today you would earn a total of  61.00  from holding ProShares UltraShort MSCI or generate 4.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

ProShares UltraShort MSCI  vs.  ARCA Oil

Pair Trading with ProShares UltraShort and ARCA Oil

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

The idea behind ProShares UltraShort MSCI and ARCA Oil 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.

Check out your portfolio center.

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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.