Correlation Between Cocoa and Lean Hogs
Can any of the company-specific risk be diversified away by investing in both Cocoa and Lean Hogs 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 Cocoa and Lean Hogs into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cocoa and Lean Hogs Futures, you can compare the effects of market volatilities on Cocoa and Lean Hogs 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 Cocoa with a short position of Lean Hogs. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cocoa and Lean Hogs.
Diversification Opportunities for Cocoa and Lean Hogs
Good diversification
The 3 months correlation between Cocoa and Lean is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Lean Hogs Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lean Hogs Futures and Cocoa 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 Cocoa are associated (or correlated) with Lean Hogs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lean Hogs Futures has no effect on the direction of Cocoa i.e., Cocoa and Lean Hogs go up and down completely randomly.
Pair Corralation between Cocoa and Lean Hogs
Assuming the 90 days horizon Cocoa is expected to generate 1.84 times more return on investment than Lean Hogs. However, Cocoa is 1.84 times more volatile than Lean Hogs Futures. It trades about 0.13 of its potential returns per unit of risk. Lean Hogs Futures is currently generating about 0.01 per unit of risk. If you would invest 772,200 in Cocoa on August 31, 2024 and sell it today you would earn a total of 134,600 from holding Cocoa or generate 17.43% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cocoa vs. Lean Hogs Futures
Performance |
| Timeline |
| Cocoa |
| Lean Hogs Futures |
Cocoa and Lean Hogs Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cocoa and Lean Hogs
The main advantage of trading using opposite Cocoa and Lean Hogs positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa position performs unexpectedly, Lean Hogs 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 Lean Hogs will offset losses from the drop in Lean Hogs' long position.The idea behind Cocoa and Lean Hogs 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.| Lean Hogs vs. Sugar | Lean Hogs vs. 10 Year T Note Futures | Lean Hogs vs. Nasdaq 100 | Lean Hogs 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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