Correlation Between M3 and CBOE Crude

Can any of the company-specific risk be diversified away by investing in both M3 and CBOE Crude 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 M3 and CBOE Crude into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between M3 Inc and CBOE Crude Oil, you can compare the effects of market volatilities on M3 and CBOE Crude 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 M3 with a short position of CBOE Crude. Check out your portfolio center. Please also check ongoing floating volatility patterns of M3 and CBOE Crude.

Diversification Opportunities for M3 and CBOE Crude

0.61

Correlation Coefficient

M3  CBOE Crude

Poor diversification

The 3 months correlation between M3 and CBOE is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding M3 Inc and CBOE Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CBOE Crude Oil and M3 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 M3 Inc are associated (or correlated) with CBOE Crude. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CBOE Crude Oil has no effect on the direction of M3 i.e., M3 and CBOE Crude go up and down completely randomly.

Pair Corralation between M3 and CBOE Crude

Assuming the 90 days horizon M3 Inc is expected to generate 0.17 times more return on investment than CBOE Crude. However, M3 Inc is 6.04 times less risky than CBOE Crude. It trades about -0.06 of its potential returns per unit of risk. CBOE Crude Oil is currently generating about -0.03 per unit of risk. If you would invest  1,020  in M3 Inc on September 29, 2024 and sell it today you would lose (47.00) from holding M3 Inc or give up 4.61% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

M3 Inc  vs.  CBOE Crude Oil

Pair Trading with M3 and CBOE Crude

The main advantage of trading using opposite M3 and CBOE Crude positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if M3 position performs unexpectedly, CBOE Crude 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 CBOE Crude will offset losses from the drop in CBOE Crude's long position.

The idea behind M3 Inc and CBOE 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.