Correlation Between Lincoln Electric and ARCA Oil

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

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

Diversification Opportunities for Lincoln Electric and ARCA Oil

0.33

Correlation Coefficient

Lincoln Electric  ARCA Oil

Weak diversification

The 3 months correlation between Lincoln and ARCA is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Lincoln Electric Holdings and ARCA Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Oil and Lincoln Electric 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 Lincoln Electric Holdings 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 Lincoln Electric i.e., Lincoln Electric and ARCA Oil go up and down completely randomly.

Pair Corralation between Lincoln Electric and ARCA Oil

Given the investment horizon of 90 days Lincoln Electric Holdings is expected to under-perform the ARCA Oil. But the stock apears to be less risky and, when comparing its historical volatility, Lincoln Electric Holdings is 1.24 times less risky than ARCA Oil. The stock trades about -0.57 of its potential returns per unit of risk. The ARCA Oil is currently generating about -0.24 of returns per unit of risk over similar time horizon. If you would invest  192,535  in ARCA Oil on October 4, 2024 and sell it today you would lose (13,072) from holding ARCA Oil or give up 6.79% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Lincoln Electric Holdings  vs.  ARCA Oil

Pair Trading with Lincoln Electric and ARCA Oil

The main advantage of trading using opposite Lincoln Electric and ARCA Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lincoln Electric 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 Lincoln Electric Holdings 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.

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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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.