Correlation Between Heating Oil and Mini Dow

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

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

Diversification Opportunities for Heating Oil and Mini Dow

0.66

Correlation Coefficient

Heating Oil  Mini Dow

Poor diversification

The 3 months correlation between Heating and Mini is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Heating Oil and Mini Dow Jones in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mini Dow Jones and Heating 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 Heating Oil are associated (or correlated) with Mini Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mini Dow Jones has no effect on the direction of Heating Oil i.e., Heating Oil and Mini Dow go up and down completely randomly.

Pair Corralation between Heating Oil and Mini Dow

Assuming the 90 days horizon Heating Oil is expected to generate about the same return on investment as Mini Dow Jones. However, Heating Oil is 1.86 times more volatile than Mini Dow Jones. It trades about -0.02 of its potential returns per unit of risk. Mini Dow Jones is currently producing about -0.04 per unit of risk. If you would invest  4,292,700  in Mini Dow Jones on December 29, 2024 and sell it today you would lose (107,600) from holding Mini Dow Jones or give up 2.51% of portfolio value over 90 days.

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

Heating Oil  vs.  Mini Dow Jones

Heating Oil

Risk-Adjusted Performance

Very Weak

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

Mini Dow Jones

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Heating Oil and Mini Dow

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

The idea behind Heating Oil and Mini Dow Jones 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.