Correlation Between Micro Gold and Lumber Futures

Can any of the company-specific risk be diversified away by investing in both Micro Gold 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 Gold 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 Gold Futures and Lumber Futures, you can compare the effects of market volatilities on Micro Gold 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 Gold with a short position of Lumber Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Micro Gold and Lumber Futures.

Diversification Opportunities for Micro Gold and Lumber Futures

-0.08

Correlation Coefficient

Micro Gold  Lumber Futures

Good diversification

The 3 months correlation between Micro and Lumber is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Micro Gold Futures and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Micro Gold 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 Gold Futures 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 Gold i.e., Micro Gold and Lumber Futures go up and down completely randomly.

Pair Corralation between Micro Gold and Lumber Futures

Assuming the 90 days trading horizon Micro Gold is expected to generate 2.88 times less return on investment than Lumber Futures. But when comparing it to its historical volatility, Micro Gold Futures is 1.51 times less risky than Lumber Futures. It trades about 0.06 of its potential returns per unit of risk. Lumber Futures is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  49,950  in Lumber Futures on September 13, 2024 and sell it today you would earn a total of  5,450  from holding Lumber Futures or generate 10.91% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Micro Gold Futures  vs.  Lumber Futures

Micro Gold Futures

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Micro Gold Futures are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Micro Gold is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Lumber Futures

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Lumber Futures may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Micro Gold and Lumber Futures

The main advantage of trading using opposite Micro Gold and Lumber Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro Gold 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.

The idea behind Micro Gold Futures and Lumber Futures 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.