Correlation Between Aluminum Futures and Coffee

Can any of the company-specific risk be diversified away by investing in both Aluminum Futures and Coffee 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 Aluminum Futures and Coffee into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Aluminum Futures and Coffee, you can compare the effects of market volatilities on Aluminum Futures and Coffee 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 Aluminum Futures with a short position of Coffee. Check out your portfolio center. Please also check ongoing floating volatility patterns of Aluminum Futures and Coffee.

Diversification Opportunities for Aluminum Futures and Coffee

0.33

Correlation Coefficient

Aluminum Futures  Coffee

Weak diversification

The 3 months correlation between Aluminum and Coffee is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Aluminum Futures and Coffee in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Coffee and Aluminum Futures 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 Aluminum Futures are associated (or correlated) with Coffee. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Coffee has no effect on the direction of Aluminum Futures i.e., Aluminum Futures and Coffee go up and down completely randomly.

Pair Corralation between Aluminum Futures and Coffee

Assuming the 90 days trading horizon Aluminum Futures is expected to generate 1.49 times less return on investment than Coffee. But when comparing it to its historical volatility, Aluminum Futures is 1.37 times less risky than Coffee. It trades about 0.13 of its potential returns per unit of risk. Coffee is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  24,420  in Coffee on September 5, 2024 and sell it today you would earn a total of  5,185  from holding Coffee or generate 21.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Aluminum Futures  vs.  Coffee

Aluminum Futures

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Aluminum Futures are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward indicators, Aluminum Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

Coffee

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Coffee are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Coffee showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Aluminum Futures and Coffee

The main advantage of trading using opposite Aluminum Futures and Coffee positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Aluminum Futures position performs unexpectedly, Coffee 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 Coffee will offset losses from the drop in Coffee's long position.

The idea behind Aluminum Futures and Coffee 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.

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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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.