Correlation Between Soybean Meal and Heating Oil

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

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

Diversification Opportunities for Soybean Meal and Heating Oil

0.12

Correlation Coefficient

Soybean Meal  Heating Oil

Average diversification

The 3 months correlation between Soybean and Heating is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Soybean Meal Futures and Heating Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Heating Oil and Soybean Meal 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 Soybean Meal Futures are associated (or correlated) with Heating Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Heating Oil has no effect on the direction of Soybean Meal i.e., Soybean Meal and Heating Oil go up and down completely randomly.

Pair Corralation between Soybean Meal and Heating Oil

Assuming the 90 days horizon Soybean Meal Futures is expected to under-perform the Heating Oil. But the commodity apears to be less risky and, when comparing its historical volatility, Soybean Meal Futures is 1.01 times less risky than Heating Oil. The commodity trades about -0.05 of its potential returns per unit of risk. The Heating Oil is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  230.00  in Heating Oil on December 30, 2024 and sell it today you would lose (7.00) from holding Heating Oil or give up 3.04% of portfolio value over 90 days.

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

Soybean Meal Futures  vs.  Heating Oil

Soybean Meal Futures

Risk-Adjusted Performance

Very Weak

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

Heating Oil

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Soybean Meal and Heating Oil

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

The idea behind Soybean Meal Futures and Heating Oil 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.