Correlation Between Cocoa and Soybean Meal

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

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

Diversification Opportunities for Cocoa and Soybean Meal

-0.55

Correlation Coefficient

Cocoa  Soybean Meal

Excellent diversification

The 3 months correlation between Cocoa and Soybean is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Soybean Meal Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Soybean Meal Futures and Cocoa 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 Cocoa are associated (or correlated) with Soybean Meal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Soybean Meal Futures has no effect on the direction of Cocoa i.e., Cocoa and Soybean Meal go up and down completely randomly.

Pair Corralation between Cocoa and Soybean Meal

Assuming the 90 days horizon Cocoa is expected to generate 2.37 times more return on investment than Soybean Meal. However, Cocoa is 2.37 times more volatile than Soybean Meal Futures. It trades about 0.13 of its potential returns per unit of risk. Soybean Meal Futures is currently generating about -0.11 per unit of risk. If you would invest  715,900  in Cocoa on September 5, 2024 and sell it today you would earn a total of  188,500  from holding Cocoa or generate 26.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.46%
Values	Daily Returns

Cocoa  vs.  Soybean Meal Futures

Cocoa

Risk-Adjusted Performance

10 of 100

OK

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

Soybean Meal Futures

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Soybean Meal Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Commodity's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Soybean Meal Futures shareholders.

Pair Trading with Cocoa and Soybean Meal

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

The idea behind Cocoa and Soybean Meal 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.

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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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.