Correlation Between Soybean Meal and Natural Gas

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

Diversification Opportunities for Soybean Meal and Natural Gas

-0.55

Correlation Coefficient

Soybean Meal  Natural Gas

Excellent diversification

The 3 months correlation between Soybean and Natural is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Soybean Meal Futures and Natural Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natural Gas 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 Natural Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natural Gas has no effect on the direction of Soybean Meal i.e., Soybean Meal and Natural Gas go up and down completely randomly.

Pair Corralation between Soybean Meal and Natural Gas

Assuming the 90 days horizon Soybean Meal Futures is expected to under-perform the Natural Gas. But the commodity apears to be less risky and, when comparing its historical volatility, Soybean Meal Futures is 3.95 times less risky than Natural Gas. The commodity trades about -0.13 of its potential returns per unit of risk. The Natural Gas is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  237.00  in Natural Gas on September 14, 2024 and sell it today you would earn a total of  111.00  from holding Natural Gas or generate 46.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Soybean Meal Futures  vs.  Natural Gas

Soybean Meal Futures

Risk-Adjusted Performance

0 of 100

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 latest unsteady performance, the Commodity's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Soybean Meal Futures shareholders.

Natural Gas

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Gas are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Natural Gas exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Soybean Meal and Natural Gas

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

The idea behind Soybean Meal Futures and Natural Gas 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.