Correlation Between Cocoa and Natural Gas
Can any of the company-specific risk be diversified away by investing in both Cocoa and Natural Gas 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 Natural Gas into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cocoa and Natural Gas, you can compare the effects of market volatilities on Cocoa and Natural Gas 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 Natural Gas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cocoa and Natural Gas.
Diversification Opportunities for Cocoa and Natural Gas
0.6 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Cocoa and Natural is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Natural Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natural Gas 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 Natural Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natural Gas has no effect on the direction of Cocoa i.e., Cocoa and Natural Gas go up and down completely randomly.
Pair Corralation between Cocoa and Natural Gas
Assuming the 90 days horizon Cocoa is expected to generate 0.73 times more return on investment than Natural Gas. However, Cocoa is 1.37 times less risky than Natural Gas. It trades about 0.36 of its potential returns per unit of risk. Natural Gas is currently generating about 0.23 per unit of risk. If you would invest 733,400 in Cocoa on September 1, 2024 and sell it today you would earn a total of 205,800 from holding Cocoa or generate 28.06% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.65% |
| Values | Daily Returns |
Cocoa vs. Natural Gas
Performance |
| Timeline |
| Cocoa |
| Natural Gas |
Cocoa and Natural Gas Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cocoa and Natural Gas
The main advantage of trading using opposite Cocoa and Natural Gas positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa position performs unexpectedly, Natural Gas 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 Natural Gas will offset losses from the drop in Natural Gas' long position.| Cocoa vs. Oat Futures | Cocoa vs. Wheat Futures | Cocoa vs. Feeder Cattle Futures | Cocoa vs. Micro Silver Futures |
| Natural Gas vs. Wheat Futures | Natural Gas vs. Feeder Cattle Futures | Natural Gas vs. Micro Silver Futures | Natural Gas vs. 30 Day Fed |
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 Commodity Directory module to find actively traded commodities issued by global exchanges.
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