Correlation Between Micro E and Lumber Futures
Can any of the company-specific risk be diversified away by investing in both Micro E and Lumber 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 Micro E and Lumber Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Micro E mini Russell and Lumber Futures, you can compare the effects of market volatilities on Micro E and Lumber 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 Micro E with a short position of Lumber Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Micro E and Lumber Futures.
Diversification Opportunities for Micro E and Lumber Futures
0.79 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Micro and Lumber is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Micro E mini Russell and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Micro E 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 Micro E mini Russell are associated (or correlated) with Lumber Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumber Futures has no effect on the direction of Micro E i.e., Micro E and Lumber Futures go up and down completely randomly.
Pair Corralation between Micro E and Lumber Futures
Assuming the 90 days trading horizon Micro E is expected to generate 1.04 times less return on investment than Lumber Futures. But when comparing it to its historical volatility, Micro E mini Russell is 2.24 times less risky than Lumber Futures. It trades about 0.05 of its potential returns per unit of risk. Lumber Futures is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest 51,500 in Lumber Futures on August 29, 2024 and sell it today you would earn a total of 7,700 from holding Lumber Futures or generate 14.95% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 92.14% |
| Values | Daily Returns |
Micro E mini Russell vs. Lumber Futures
Performance |
| Timeline |
| Micro E mini |
| Lumber Futures |
Micro E and Lumber Futures Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Micro E and Lumber Futures
The main advantage of trading using opposite Micro E and Lumber Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro E position performs unexpectedly, Lumber 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 Lumber Futures will offset losses from the drop in Lumber Futures' long position.| Micro E vs. 2 Year T Note Futures | Micro E vs. Heating Oil | Micro E vs. Crude Oil | Micro E vs. Aluminum Futures |
| Lumber Futures vs. Sugar | Lumber Futures vs. 10 Year T Note Futures | Lumber Futures vs. Nasdaq 100 | Lumber Futures vs. Oat Futures |
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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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