Correlation Between Total Stock and US Oil

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

Diversification Opportunities for Total Stock and US Oil

0.11
  Correlation Coefficient

Average diversification

The 3 months correlation between Total and US Oil is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Total Stock Market and US Oil Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Oil Fund and Total Stock 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 Total Stock Market are associated (or correlated) with US Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Oil Fund has no effect on the direction of Total Stock i.e., Total Stock and US Oil go up and down completely randomly.

Pair Corralation between Total Stock and US Oil

Considering the 90-day investment horizon Total Stock Market is expected to generate 0.54 times more return on investment than US Oil. However, Total Stock Market is 1.86 times less risky than US Oil. It trades about -0.35 of its potential returns per unit of risk. US Oil Fund is currently generating about -0.35 per unit of risk. If you would invest  20,228  in Total Stock Market on June 30, 2022 and sell it today you would lose (2,031)  from holding Total Stock Market or give up 10.04% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Total Stock Market  vs.  US Oil Fund

 Performance (%) 
       Timeline  
Total Stock Market 
Total Performance
0 of 100
Over the last 90 days Total Stock Market has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Total Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Total Price Channel

US Oil Fund 
US Oil Performance
0 of 100
Over the last 90 days US Oil Fund has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Etf's basic indicators remain quite persistent which may send shares a bit higher in October 2022. The latest mess may also be a sign of long-standing up-swing for the ETF venture institutional investors.

US Oil Price Channel

Total Stock and US Oil Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Total Stock and US Oil

The main advantage of trading using opposite Total Stock and US Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Total Stock position performs unexpectedly, US Oil 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 US Oil will offset losses from the drop in US Oil's long position.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Total Stock as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Total Stock's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Total Stock's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Total Stock Market.
The idea behind Total Stock Market and US Oil Fund 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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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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.

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