Correlation Between Natural Gas and Cocoa
Can any of the company-specific risk be diversified away by investing in both Natural Gas 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 Natural Gas and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Natural Gas and Cocoa, you can compare the effects of market volatilities on Natural Gas 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 Natural Gas with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Natural Gas and Cocoa.
Diversification Opportunities for Natural Gas and Cocoa
0.6 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Natural and Cocoa is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Natural Gas and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Natural Gas 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 Natural Gas 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 Natural Gas i.e., Natural Gas and Cocoa go up and down completely randomly.
Pair Corralation between Natural Gas and Cocoa
Assuming the 90 days horizon Natural Gas is expected to generate 1.14 times less return on investment than Cocoa. In addition to that, Natural Gas is 1.37 times more volatile than Cocoa. It trades about 0.23 of its total potential returns per unit of risk. Cocoa is currently generating about 0.36 per unit of volatility. If you would invest 733,400 in Cocoa on September 1, 2024 and sell it today you would earn a total of 205,800 from holding Cocoa or generate 28.06% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.65% |
| Values | Daily Returns |
Natural Gas vs. Cocoa
Performance |
| Timeline |
| Natural Gas |
| Cocoa |
Natural Gas and Cocoa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Natural Gas and Cocoa
The main advantage of trading using opposite Natural Gas and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Natural Gas 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.| Natural Gas vs. Wheat Futures | Natural Gas vs. Feeder Cattle Futures | Natural Gas vs. Micro Silver Futures | Natural Gas vs. 30 Day Fed |
| Cocoa vs. Oat Futures | Cocoa vs. Wheat Futures | Cocoa vs. Feeder Cattle 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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