Correlation Between US Commodity and IShares Energy

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Can any of the company-specific risk be diversified away by investing in both US Commodity and IShares Energy 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 US Commodity and IShares Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between US Commodity Funds and iShares Energy Storage, you can compare the effects of market volatilities on US Commodity and IShares Energy 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 US Commodity with a short position of IShares Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of US Commodity and IShares Energy.

Diversification Opportunities for US Commodity and IShares Energy

-0.55
  Correlation Coefficient

Excellent diversification

The 3 months correlation between ALUM and IShares is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding US Commodity Funds and iShares Energy Storage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Energy Storage and US Commodity 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 US Commodity Funds are associated (or correlated) with IShares Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Energy Storage has no effect on the direction of US Commodity i.e., US Commodity and IShares Energy go up and down completely randomly.

Pair Corralation between US Commodity and IShares Energy

Given the investment horizon of 90 days US Commodity Funds is expected to generate 1.58 times more return on investment than IShares Energy. However, US Commodity is 1.58 times more volatile than iShares Energy Storage. It trades about 0.12 of its potential returns per unit of risk. iShares Energy Storage is currently generating about -0.02 per unit of risk. If you would invest  3,100  in US Commodity Funds on September 2, 2024 and sell it today you would earn a total of  221.00  from holding US Commodity Funds or generate 7.13% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy46.88%
ValuesDaily Returns

US Commodity Funds  vs.  iShares Energy Storage

 Performance 
       Timeline  
US Commodity Funds 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
OK
Over the last 90 days US Commodity Funds has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very fragile basic indicators, US Commodity displayed solid returns over the last few months and may actually be approaching a breakup point.
iShares Energy Storage 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days iShares Energy Storage has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, IShares Energy is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

US Commodity and IShares Energy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with US Commodity and IShares Energy

The main advantage of trading using opposite US Commodity and IShares Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if US Commodity position performs unexpectedly, IShares Energy 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 IShares Energy will offset losses from the drop in IShares Energy's long position.
The idea behind US Commodity Funds and iShares Energy Storage 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.

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