Correlation Between Oil and Matco Foods

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

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

Diversification Opportunities for Oil and Matco Foods

0.94

Correlation Coefficient

Oil  Matco Foods

Almost no diversification

The 3 months correlation between Oil and Matco is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Oil and Gas and Matco Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Matco Foods and Oil 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 Oil and Gas are associated (or correlated) with Matco Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Matco Foods has no effect on the direction of Oil i.e., Oil and Matco Foods go up and down completely randomly.

Pair Corralation between Oil and Matco Foods

Assuming the 90 days trading horizon Oil is expected to generate 2.21 times less return on investment than Matco Foods. But when comparing it to its historical volatility, Oil and Gas is 1.53 times less risky than Matco Foods. It trades about 0.18 of its potential returns per unit of risk. Matco Foods is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  2,374  in Matco Foods on October 23, 2024 and sell it today you would earn a total of  2,127  from holding Matco Foods or generate 89.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Oil and Gas  vs.  Matco Foods

Oil and Gas

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Oil and Gas are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Oil sustained solid returns over the last few months and may actually be approaching a breakup point.

Matco Foods

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Matco Foods are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Matco Foods reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Oil and Matco Foods

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

The idea behind Oil and Gas and Matco Foods 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.