Correlation Between Energy Services and Precious Metals

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

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

Diversification Opportunities for Energy Services and Precious Metals

-0.45

Correlation Coefficient

Energy Services  Precious Metals

Very good diversification

The 3 months correlation between Energy and Precious is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Energy Services Fund and Precious Metals Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Precious Metals and Energy Services 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 Energy Services Fund are associated (or correlated) with Precious Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Precious Metals has no effect on the direction of Energy Services i.e., Energy Services and Precious Metals go up and down completely randomly.

Pair Corralation between Energy Services and Precious Metals

Assuming the 90 days horizon Energy Services Fund is expected to generate 0.8 times more return on investment than Precious Metals. However, Energy Services Fund is 1.25 times less risky than Precious Metals. It trades about -0.24 of its potential returns per unit of risk. Precious Metals Fund is currently generating about -0.23 per unit of risk. If you would invest  23,766  in Energy Services Fund on September 20, 2024 and sell it today you would lose (1,952) from holding Energy Services Fund or give up 8.21% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Energy Services Fund  vs.  Precious Metals Fund

Energy Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Services Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Precious Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Precious Metals Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's primary indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Energy Services and Precious Metals

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

The idea behind Energy Services Fund and Precious Metals Fund 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.