Correlation Between Natural Gas and Wheat Futures

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

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

Diversification Opportunities for Natural Gas and Wheat Futures

0.01

Correlation Coefficient

Natural Gas  Wheat Futures

Significant diversification

The 3 months correlation between Natural and Wheat is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Natural Gas and Wheat Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wheat Futures and Natural Gas 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 Natural Gas are associated (or correlated) with Wheat Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wheat Futures has no effect on the direction of Natural Gas i.e., Natural Gas and Wheat Futures go up and down completely randomly.

Pair Corralation between Natural Gas and Wheat Futures

Assuming the 90 days horizon Natural Gas is expected to generate 2.78 times more return on investment than Wheat Futures. However, Natural Gas is 2.78 times more volatile than Wheat Futures. It trades about 0.04 of its potential returns per unit of risk. Wheat Futures is currently generating about 0.0 per unit of risk. If you would invest  394.00  in Natural Gas on December 29, 2024 and sell it today you would earn a total of  16.00  from holding Natural Gas or generate 4.06% return on investment over 90 days.

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

Natural Gas  vs.  Wheat Futures

Natural Gas

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Gas are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Natural Gas may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Wheat Futures

Risk-Adjusted Performance

Very Weak

Over the last 90 days Wheat Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Wheat Futures is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Natural Gas and Wheat Futures

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

The idea behind Natural Gas and Wheat 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.