Correlation Between Feeder Cattle and Cocoa

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

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

Diversification Opportunities for Feeder Cattle and Cocoa

0.67

Correlation Coefficient

Feeder Cattle  Cocoa

Poor diversification

The 3 months correlation between Feeder and Cocoa is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Feeder Cattle Futures and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Feeder Cattle 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 Feeder Cattle 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 Feeder Cattle i.e., Feeder Cattle and Cocoa go up and down completely randomly.

Pair Corralation between Feeder Cattle and Cocoa

Assuming the 90 days horizon Feeder Cattle is expected to generate 8.79 times less return on investment than Cocoa. But when comparing it to its historical volatility, Feeder Cattle Futures is 5.1 times less risky than Cocoa. It trades about 0.33 of its potential returns per unit of risk. Cocoa is currently generating about 0.57 of returns per unit of risk over similar time horizon. If you would invest  717,400  in Cocoa on September 12, 2024 and sell it today you would earn a total of  351,100  from holding Cocoa or generate 48.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Feeder Cattle Futures  vs.  Cocoa

Feeder Cattle Futures

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Feeder Cattle Futures are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Feeder Cattle is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Cocoa

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cocoa are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Cocoa exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Feeder Cattle and Cocoa

The main advantage of trading using opposite Feeder Cattle and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Feeder Cattle 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.

The idea behind Feeder Cattle Futures and Cocoa 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.