Correlation Between Oil and National Foods

Can any of the company-specific risk be diversified away by investing in both Oil and National 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 National 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 National Foods, you can compare the effects of market volatilities on Oil and National 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 National Foods. Check out your portfolio center. Please also check ongoing floating volatility patterns of Oil and National Foods.

Diversification Opportunities for Oil and National Foods

0.85

Correlation Coefficient

Oil  National Foods

Very poor diversification

The 3 months correlation between Oil and National is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Oil and Gas and National Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National 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 National Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Foods has no effect on the direction of Oil i.e., Oil and National Foods go up and down completely randomly.

Pair Corralation between Oil and National Foods

Assuming the 90 days trading horizon Oil and Gas is expected to generate 1.52 times more return on investment than National Foods. However, Oil is 1.52 times more volatile than National Foods. It trades about 0.17 of its potential returns per unit of risk. National Foods is currently generating about 0.18 per unit of risk. If you would invest  18,322  in Oil and Gas on October 8, 2024 and sell it today you would earn a total of  3,886  from holding Oil and Gas or generate 21.21% return on investment over 90 days.

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

Oil and Gas  vs.  National 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.

National Foods

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in National Foods are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat conflicting basic indicators, National Foods may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Oil and National Foods

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

The idea behind Oil and Gas and National 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.