Correlation Between Micro Gold and Cocoa
Can any of the company-specific risk be diversified away by investing in both Micro Gold 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 Micro Gold and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Micro Gold Futures and Cocoa, you can compare the effects of market volatilities on Micro Gold 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 Micro Gold with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Micro Gold and Cocoa.
Diversification Opportunities for Micro Gold and Cocoa
-0.22 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Micro and Cocoa is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Micro Gold Futures and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Micro Gold 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 Micro Gold 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 Micro Gold i.e., Micro Gold and Cocoa go up and down completely randomly.
Pair Corralation between Micro Gold and Cocoa
Assuming the 90 days trading horizon Micro Gold is expected to generate 10.82 times less return on investment than Cocoa. But when comparing it to its historical volatility, Micro Gold Futures is 3.38 times less risky than Cocoa. It trades about 0.03 of its potential returns per unit of risk. Cocoa is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 786,700 in Cocoa on August 25, 2024 and sell it today you would earn a total of 109,600 from holding Cocoa or generate 13.93% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Micro Gold Futures vs. Cocoa
Performance |
| Timeline |
| Micro Gold Futures |
| Cocoa |
Micro Gold and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Micro Gold and Cocoa
The main advantage of trading using opposite Micro Gold and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro Gold 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.| Micro Gold vs. Class III Milk | Micro Gold vs. Five Year Treasury Note | Micro Gold vs. Orange Juice | Micro Gold vs. Brent Crude Oil |
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.
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