Correlation Between Palladium and Lumber Futures

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

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

Diversification Opportunities for Palladium and Lumber Futures

0.47

Correlation Coefficient

Palladium  Lumber Futures

Very weak diversification

The 3 months correlation between Palladium and Lumber is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Palladium and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Palladium 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 Palladium are associated (or correlated) with Lumber Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumber Futures has no effect on the direction of Palladium i.e., Palladium and Lumber Futures go up and down completely randomly.

Pair Corralation between Palladium and Lumber Futures

Assuming the 90 days horizon Palladium is expected to under-perform the Lumber Futures. In addition to that, Palladium is 1.17 times more volatile than Lumber Futures. It trades about -0.04 of its total potential returns per unit of risk. Lumber Futures is currently generating about 0.09 per unit of volatility. If you would invest  58,900  in Lumber Futures on November 28, 2024 and sell it today you would earn a total of  5,150  from holding Lumber Futures or generate 8.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	93.65%
Values	Daily Returns

Palladium  vs.  Lumber Futures

Palladium

Risk-Adjusted Performance

Very Weak

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

Lumber Futures

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Lumber Futures may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Palladium and Lumber Futures

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

The idea behind Palladium and Lumber 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.

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.