Correlation Between Cocoa and Palladium
Can any of the company-specific risk be diversified away by investing in both Cocoa and Palladium 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 Palladium into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cocoa and Palladium, you can compare the effects of market volatilities on Cocoa and Palladium 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 Palladium. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cocoa and Palladium.
Diversification Opportunities for Cocoa and Palladium
Very good diversification
The 3 months correlation between Cocoa and Palladium is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Palladium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Palladium 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 Palladium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Palladium has no effect on the direction of Cocoa i.e., Cocoa and Palladium go up and down completely randomly.
Pair Corralation between Cocoa and Palladium
Assuming the 90 days horizon Cocoa is expected to under-perform the Palladium. In addition to that, Cocoa is 1.57 times more volatile than Palladium. It trades about -0.36 of its total potential returns per unit of risk. Palladium is currently generating about 0.04 per unit of volatility. If you would invest 97,300 in Palladium on November 27, 2024 and sell it today you would earn a total of 1,550 from holding Palladium or generate 1.59% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cocoa vs. Palladium
Performance |
| Timeline |
| Cocoa |
| Palladium |
Cocoa and Palladium Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cocoa and Palladium
The main advantage of trading using opposite Cocoa and Palladium positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa position performs unexpectedly, Palladium 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 Palladium will offset losses from the drop in Palladium's long position.The idea behind Cocoa and Palladium 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.| Palladium vs. Micro E mini Russell | Palladium vs. Lumber Futures | Palladium vs. Micro Gold Futures | Palladium vs. Cotton |
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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.
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