Correlation Between Western Asset and Gold Futures

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

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

Diversification Opportunities for Western Asset and Gold Futures

0.64

Correlation Coefficient

Western Asset  Gold Futures

Poor diversification

The 3 months correlation between Western and Gold is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Claymore and Gold Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gold Futures and Western Asset 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 Western Asset Claymore are associated (or correlated) with Gold Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gold Futures has no effect on the direction of Western Asset i.e., Western Asset and Gold Futures go up and down completely randomly.

Pair Corralation between Western Asset and Gold Futures

Considering the 90-day investment horizon Western Asset is expected to generate 4.88 times less return on investment than Gold Futures. But when comparing it to its historical volatility, Western Asset Claymore is 1.65 times less risky than Gold Futures. It trades about 0.05 of its potential returns per unit of risk. Gold Futures is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  268,100  in Gold Futures on November 28, 2024 and sell it today you would earn a total of  24,800  from holding Gold Futures or generate 9.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	92.06%
Values	Daily Returns

Western Asset Claymore  vs.  Gold Futures

Western Asset Claymore

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Western Asset Claymore are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable forward indicators, Western Asset is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Gold Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Gold Futures are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Gold Futures may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Western Asset and Gold Futures

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

The idea behind Western Asset Claymore and Gold 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.

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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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.