Correlation Between Heating Oil and Coffee
Can any of the company-specific risk be diversified away by investing in both Heating Oil and Coffee 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 Heating Oil and Coffee into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Heating Oil and Coffee, you can compare the effects of market volatilities on Heating Oil and Coffee 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 Heating Oil with a short position of Coffee. Check out your portfolio center. Please also check ongoing floating volatility patterns of Heating Oil and Coffee.
Diversification Opportunities for Heating Oil and Coffee
0.08 | Correlation Coefficient |
Significant diversification
The 3 months correlation between Heating and Coffee is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Heating Oil and Coffee in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Coffee and Heating Oil 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 Heating Oil are associated (or correlated) with Coffee. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Coffee has no effect on the direction of Heating Oil i.e., Heating Oil and Coffee go up and down completely randomly.
Pair Corralation between Heating Oil and Coffee
Assuming the 90 days horizon Heating Oil is expected to generate 4.32 times less return on investment than Coffee. But when comparing it to its historical volatility, Heating Oil is 1.25 times less risky than Coffee. It trades about 0.14 of its potential returns per unit of risk. Coffee is currently generating about 0.48 of returns per unit of risk over similar time horizon. If you would invest 25,235 in Coffee on August 29, 2024 and sell it today you would earn a total of 5,690 from holding Coffee or generate 22.55% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Heating Oil vs. Coffee
Performance |
| Timeline |
| Heating Oil |
| Coffee |
Heating Oil and Coffee Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Heating Oil and Coffee
The main advantage of trading using opposite Heating Oil and Coffee positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Heating Oil position performs unexpectedly, Coffee 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 Coffee will offset losses from the drop in Coffee's long position.| Heating Oil vs. Natural Gas | Heating Oil vs. Cotton | Heating Oil vs. Class III Milk | Heating Oil vs. Cocoa |
| Coffee vs. Wheat Futures | Coffee vs. Feeder Cattle Futures | Coffee vs. Micro Silver Futures | Coffee vs. 30 Day Fed |
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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.
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