Correlation Between Copper and Cocoa
Can any of the company-specific risk be diversified away by investing in both Copper 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 Copper and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Copper and Cocoa, you can compare the effects of market volatilities on Copper 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 Copper with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Copper and Cocoa.
Diversification Opportunities for Copper and Cocoa
Very good diversification
The 3 months correlation between Copper and Cocoa is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Copper and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Copper 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 Copper 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 Copper i.e., Copper and Cocoa go up and down completely randomly.
Pair Corralation between Copper and Cocoa
Assuming the 90 days horizon Copper is expected to under-perform the Cocoa. But the commodity apears to be less risky and, when comparing its historical volatility, Copper is 1.66 times less risky than Cocoa. The commodity trades about -0.11 of its potential returns per unit of risk. The Cocoa is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest 739,100 in Cocoa on August 31, 2024 and sell it today you would earn a total of 167,700 from holding Cocoa or generate 22.69% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 95.65% |
| Values | Daily Returns |
Copper vs. Cocoa
Performance |
| Timeline |
| Copper |
| Cocoa |
Copper and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Copper and Cocoa
The main advantage of trading using opposite Copper and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Copper 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.The idea behind Copper and Cocoa 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.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.
Other Complementary Tools
| FinTech Suite Use AI to screen and filter profitable investment opportunities | |
| Portfolio Rebalancing Analyze risk-adjusted returns against different time horizons to find asset-allocation targets | |
| Correlation Analysis Reduce portfolio risk simply by holding instruments which are not perfectly correlated | |
| Share Portfolio Track or share privately all of your investments from the convenience of any device | |
| Global Correlations Find global opportunities by holding instruments from different markets |