Correlation Between Sugar and Lumber Futures
Can any of the company-specific risk be diversified away by investing in both Sugar and Lumber Futures 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 Sugar and Lumber Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Sugar and Lumber Futures, you can compare the effects of market volatilities on Sugar and Lumber Futures 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 Sugar with a short position of Lumber Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sugar and Lumber Futures.
Diversification Opportunities for Sugar and Lumber Futures
0.37 | Correlation Coefficient |
Weak diversification
The 3 months correlation between Sugar and Lumber is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding Sugar and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Sugar 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 Sugar are associated (or correlated) with Lumber Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumber Futures has no effect on the direction of Sugar i.e., Sugar and Lumber Futures go up and down completely randomly.
Pair Corralation between Sugar and Lumber Futures
Assuming the 90 days horizon Sugar is expected to under-perform the Lumber Futures. But the commodity apears to be less risky and, when comparing its historical volatility, Sugar is 1.46 times less risky than Lumber Futures. The commodity trades about -0.22 of its potential returns per unit of risk. The Lumber Futures is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest 54,950 in Lumber Futures on September 1, 2024 and sell it today you would earn a total of 3,950 from holding Lumber Futures or generate 7.19% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 91.3% |
| Values | Daily Returns |
Sugar vs. Lumber Futures
Performance |
| Timeline |
| Sugar |
| Lumber Futures |
Sugar and Lumber Futures Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Sugar and Lumber Futures
The main advantage of trading using opposite Sugar and Lumber Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sugar position performs unexpectedly, Lumber Futures 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 Lumber Futures will offset losses from the drop in Lumber Futures' long position.The idea behind Sugar and Lumber 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.| Lumber Futures vs. Aluminum Futures | Lumber Futures vs. Live Cattle Futures | Lumber Futures vs. Micro E mini Russell | Lumber Futures vs. Corn 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.
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