Correlation Between Live Cattle and Heating Oil

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

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

Diversification Opportunities for Live Cattle and Heating Oil

0.61

Correlation Coefficient

Live Cattle  Heating Oil

Poor diversification

The 3 months correlation between Live and Heating is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Live Cattle Futures and Heating Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Heating Oil and Live Cattle 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 Live Cattle Futures are associated (or correlated) with Heating Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Heating Oil has no effect on the direction of Live Cattle i.e., Live Cattle and Heating Oil go up and down completely randomly.

Pair Corralation between Live Cattle and Heating Oil

Assuming the 90 days horizon Live Cattle Futures is expected to generate 0.31 times more return on investment than Heating Oil. However, Live Cattle Futures is 3.21 times less risky than Heating Oil. It trades about 0.14 of its potential returns per unit of risk. Heating Oil is currently generating about -0.02 per unit of risk. If you would invest  17,927  in Live Cattle Futures on September 2, 2024 and sell it today you would earn a total of  936.00  from holding Live Cattle Futures or generate 5.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.97%
Values	Daily Returns

Live Cattle Futures  vs.  Heating Oil

Live Cattle Futures

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Live Cattle Futures are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Live Cattle is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Heating Oil

Risk-Adjusted Performance

0 of 100

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.

Pair Trading with Live Cattle and Heating Oil

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

The idea behind Live Cattle Futures and Heating 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.