Correlation Between Class III and Cocoa
Can any of the company-specific risk be diversified away by investing in both Class III and Cocoa 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 Class III and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Class III Milk and Cocoa, you can compare the effects of market volatilities on Class III and Cocoa 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 Class III with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Class III and Cocoa.
Diversification Opportunities for Class III and Cocoa
Good diversification
The 3 months correlation between Class and Cocoa is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Class III Milk and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Class III 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 Class III Milk are associated (or correlated) with Cocoa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cocoa has no effect on the direction of Class III i.e., Class III and Cocoa go up and down completely randomly.
Pair Corralation between Class III and Cocoa
Assuming the 90 days horizon Class III Milk is expected to under-perform the Cocoa. But the commodity apears to be less risky and, when comparing its historical volatility, Class III Milk is 3.49 times less risky than Cocoa. The commodity trades about -0.2 of its potential returns per unit of risk. The Cocoa is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest 1,113,700 in Cocoa on November 2, 2024 and sell it today you would lose (4,800) from holding Cocoa or give up 0.43% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Class III Milk vs. Cocoa
Performance |
| Timeline |
| Class III Milk |
| Cocoa |
Class III and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Class III and Cocoa
The main advantage of trading using opposite Class III and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Class III position performs unexpectedly, Cocoa 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 Cocoa will offset losses from the drop in Cocoa's long position.| Class III vs. Crude Oil | Class III vs. Micro E mini Russell | Class III vs. Lumber Futures | Class III vs. Palladium |
| Cocoa vs. Feeder Cattle Futures | Cocoa vs. 2 Year T Note Futures | Cocoa vs. Silver Futures | Cocoa vs. Micro Silver 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.
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