Correlation Between E Mini and Crude Oil

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

By analyzing existing cross correlation between E Mini SP 500 and Crude Oil, you can compare the effects of market volatilities on E Mini and Crude 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 E Mini with a short position of Crude Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of E Mini and Crude Oil.

Diversification Opportunities for E Mini and Crude Oil

0.59

Correlation Coefficient

E Mini  Crude Oil

Very weak diversification

The 3 months correlation between ESUSD and Crude is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding E Mini SP 500 and Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Crude Oil and E Mini 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 E Mini SP 500 are associated (or correlated) with Crude Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Crude Oil has no effect on the direction of E Mini i.e., E Mini and Crude Oil go up and down completely randomly.

Pair Corralation between E Mini and Crude Oil

Assuming the 90 days horizon E Mini SP 500 is expected to under-perform the Crude Oil. But the commodity apears to be less risky and, when comparing its historical volatility, E Mini SP 500 is 1.38 times less risky than Crude Oil. The commodity trades about -0.08 of its potential returns per unit of risk. The Crude Oil is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  7,099  in Crude Oil on December 28, 2024 and sell it today you would lose (184.00) from holding Crude Oil or give up 2.59% of portfolio value over 90 days.

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

E Mini SP 500  vs.  Crude Oil

E Mini SP

Risk-Adjusted Performance

Very Weak

Over the last 90 days E Mini SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, E Mini is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Crude Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Crude Oil has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Pair Trading with E Mini and Crude Oil

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

The idea behind E Mini SP 500 and Crude 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.

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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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.