Correlation Between Lumber Futures and Crude Oil

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

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

Diversification Opportunities for Lumber Futures and Crude Oil

-0.14

Correlation Coefficient

Lumber Futures  Crude Oil

Good diversification

The 3 months correlation between Lumber and Crude is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Lumber Futures and Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Crude Oil and Lumber Futures 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 Lumber Futures 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 Lumber Futures i.e., Lumber Futures and Crude Oil go up and down completely randomly.

Pair Corralation between Lumber Futures and Crude Oil

Assuming the 90 days horizon Lumber Futures is expected to generate 0.78 times more return on investment than Crude Oil. However, Lumber Futures is 1.29 times less risky than Crude Oil. It trades about 0.17 of its potential returns per unit of risk. Crude Oil is currently generating about 0.02 per unit of risk. If you would invest  49,900  in Lumber Futures on September 5, 2024 and sell it today you would earn a total of  9,600  from holding Lumber Futures or generate 19.24% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Lumber Futures  vs.  Crude Oil

Lumber Futures

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Lumber Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Lumber Futures and Crude Oil

The main advantage of trading using opposite Lumber Futures and Crude Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lumber Futures 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 Lumber Futures 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.