Correlation Between Live Cattle and Cocoa
Can any of the company-specific risk be diversified away by investing in both Live Cattle 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 Live Cattle and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Live Cattle Futures and Cocoa, you can compare the effects of market volatilities on Live Cattle 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 Live Cattle with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Live Cattle and Cocoa.
Diversification Opportunities for Live Cattle and Cocoa
0.32 | Correlation Coefficient |
Weak diversification
The 3 months correlation between Live and Cocoa is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Live Cattle Futures and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Live Cattle 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 Live Cattle Futures 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 Live Cattle i.e., Live Cattle and Cocoa go up and down completely randomly.
Pair Corralation between Live Cattle and Cocoa
Assuming the 90 days horizon Live Cattle is expected to generate 5.92 times less return on investment than Cocoa. But when comparing it to its historical volatility, Live Cattle Futures is 2.65 times less risky than Cocoa. It trades about 0.04 of its potential returns per unit of risk. Cocoa is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 273,200 in Cocoa on November 27, 2024 and sell it today you would earn a total of 583,400 from holding Cocoa or generate 213.54% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 98.81% |
| Values | Daily Returns |
Live Cattle Futures vs. Cocoa
Performance |
| Timeline |
| Live Cattle Futures |
| Cocoa |
Live Cattle and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Live Cattle and Cocoa
The main advantage of trading using opposite Live Cattle and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Live Cattle 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.| Live Cattle vs. Micro E mini Russell | Live Cattle vs. Cocoa | Live Cattle vs. Corn Futures | Live Cattle vs. US Dollar |
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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