Correlation Between Nasdaq 100 and Crude Oil

Can any of the company-specific risk be diversified away by investing in both Nasdaq 100 and Crude 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 Nasdaq 100 and Crude Oil into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Nasdaq 100 and Crude Oil, you can compare the effects of market volatilities on Nasdaq 100 and Crude 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 Nasdaq 100 with a short position of Crude Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq 100 and Crude Oil.

Diversification Opportunities for Nasdaq 100 and Crude Oil

-0.04

Correlation Coefficient

Nasdaq 100  Crude Oil

Good diversification

The 3 months correlation between Nasdaq and Crude is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 and Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Crude Oil and Nasdaq 100 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 Nasdaq 100 are associated (or correlated) with Crude Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Crude Oil has no effect on the direction of Nasdaq 100 i.e., Nasdaq 100 and Crude Oil go up and down completely randomly.

Pair Corralation between Nasdaq 100 and Crude Oil

Assuming the 90 days horizon Nasdaq 100 is expected to generate 0.75 times more return on investment than Crude Oil. However, Nasdaq 100 is 1.33 times less risky than Crude Oil. It trades about -0.14 of its potential returns per unit of risk. Crude Oil is currently generating about -0.11 per unit of risk. If you would invest  2,162,475  in Nasdaq 100 on December 1, 2024 and sell it today you would lose (72,425) from holding Nasdaq 100 or give up 3.35% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Nasdaq 100  vs.  Crude Oil

Nasdaq 100

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nasdaq 100 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Nasdaq 100 is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Crude Oil

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Crude Oil are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Crude 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 Nasdaq 100 and Crude Oil

The main advantage of trading using opposite Nasdaq 100 and Crude Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq 100 position performs unexpectedly, Crude 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 Crude Oil will offset losses from the drop in Crude Oil's long position.

The idea behind Nasdaq 100 and 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.