Correlation Between Lumber Futures and Micro Gold

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

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

Diversification Opportunities for Lumber Futures and Micro Gold

0.72

Correlation Coefficient

Lumber Futures  Micro Gold

Poor diversification

The 3 months correlation between Lumber and Micro is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Lumber Futures and Micro Gold Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Micro Gold Futures 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 Micro Gold. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Micro Gold Futures has no effect on the direction of Lumber Futures i.e., Lumber Futures and Micro Gold go up and down completely randomly.

Pair Corralation between Lumber Futures and Micro Gold

Assuming the 90 days horizon Lumber Futures is expected to generate 2.2 times more return on investment than Micro Gold. However, Lumber Futures is 2.2 times more volatile than Micro Gold Futures. It trades about 0.18 of its potential returns per unit of risk. Micro Gold Futures is currently generating about 0.34 per unit of risk. If you would invest  55,450  in Lumber Futures on December 30, 2024 and sell it today you would earn a total of  12,550  from holding Lumber Futures or generate 22.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.92%
Values	Daily Returns

Lumber Futures  vs.  Micro Gold Futures

Lumber Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lumber Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

Micro Gold Futures

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Micro Gold Futures are ranked lower than 26 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Micro Gold exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lumber Futures and Micro Gold

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

The idea behind Lumber Futures and Micro Gold 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.