Correlation Between Cocoa and Orange Juice
Can any of the company-specific risk be diversified away by investing in both Cocoa and Orange Juice 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 Orange Juice into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cocoa and Orange Juice, you can compare the effects of market volatilities on Cocoa and Orange Juice 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 Orange Juice. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cocoa and Orange Juice.
Diversification Opportunities for Cocoa and Orange Juice
0.02 | Correlation Coefficient |
Significant diversification
The 3 months correlation between Cocoa and Orange is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Orange Juice in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Orange Juice 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 Orange Juice. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Orange Juice has no effect on the direction of Cocoa i.e., Cocoa and Orange Juice go up and down completely randomly.
Pair Corralation between Cocoa and Orange Juice
Assuming the 90 days horizon Cocoa is expected to generate 1.54 times more return on investment than Orange Juice. However, Cocoa is 1.54 times more volatile than Orange Juice. It trades about 0.44 of its potential returns per unit of risk. Orange Juice is currently generating about 0.11 per unit of risk. If you would invest 675,600 in Cocoa on August 25, 2024 and sell it today you would earn a total of 220,700 from holding Cocoa or generate 32.67% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cocoa vs. Orange Juice
Performance |
| Timeline |
| Cocoa |
| Orange Juice |
Cocoa and Orange Juice Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cocoa and Orange Juice
The main advantage of trading using opposite Cocoa and Orange Juice positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa position performs unexpectedly, Orange Juice 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 Orange Juice will offset losses from the drop in Orange Juice's long position.The idea behind Cocoa and Orange Juice 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.| Orange Juice vs. Brent Crude Oil | Orange Juice vs. Natural Gas | Orange Juice vs. Five Year Treasury Note | Orange Juice vs. Micro Gold 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
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