Correlation Between Coffee and Feeder Cattle

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Can any of the company-specific risk be diversified away by investing in both Coffee and Feeder Cattle 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 Coffee and Feeder Cattle into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Coffee and Feeder Cattle Futures, you can compare the effects of market volatilities on Coffee and Feeder Cattle 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 Coffee with a short position of Feeder Cattle. Check out your portfolio center. Please also check ongoing floating volatility patterns of Coffee and Feeder Cattle.

Diversification Opportunities for Coffee and Feeder Cattle

0.64
  Correlation Coefficient

Poor diversification

The 3 months correlation between Coffee and Feeder is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Coffee and Feeder Cattle Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Feeder Cattle Futures and Coffee 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 Coffee are associated (or correlated) with Feeder Cattle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Feeder Cattle Futures has no effect on the direction of Coffee i.e., Coffee and Feeder Cattle go up and down completely randomly.

Pair Corralation between Coffee and Feeder Cattle

Assuming the 90 days horizon Coffee is expected to generate 2.78 times more return on investment than Feeder Cattle. However, Coffee is 2.78 times more volatile than Feeder Cattle Futures. It trades about 0.48 of its potential returns per unit of risk. Feeder Cattle Futures is currently generating about 0.21 per unit of risk. If you would invest  25,235  in Coffee on August 29, 2024 and sell it today you would earn a total of  5,690  from holding Coffee or generate 22.55% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Coffee  vs.  Feeder Cattle Futures

 Performance 
       Timeline  
Coffee 

Risk-Adjusted Performance

13 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Coffee are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Coffee showed solid returns over the last few months and may actually be approaching a breakup point.
Feeder Cattle Futures 

Risk-Adjusted Performance

15 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Feeder Cattle Futures are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Feeder Cattle may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Coffee and Feeder Cattle Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Coffee and Feeder Cattle

The main advantage of trading using opposite Coffee and Feeder Cattle positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Coffee position performs unexpectedly, Feeder Cattle 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 Feeder Cattle will offset losses from the drop in Feeder Cattle's long position.
The idea behind Coffee and Feeder Cattle Futures 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.

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