Correlation Between Orange Juice and Lumber Futures

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

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

Diversification Opportunities for Orange Juice and Lumber Futures

0.31

Correlation Coefficient

Orange Juice  Lumber Futures

Weak diversification

The 3 months correlation between Orange and Lumber is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Orange Juice and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Orange Juice 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 Orange Juice 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 Orange Juice i.e., Orange Juice and Lumber Futures go up and down completely randomly.

Pair Corralation between Orange Juice and Lumber Futures

Assuming the 90 days horizon Orange Juice is expected to generate 1.92 times less return on investment than Lumber Futures. In addition to that, Orange Juice is 1.32 times more volatile than Lumber Futures. It trades about 0.05 of its total potential returns per unit of risk. Lumber Futures is currently generating about 0.13 per unit of volatility. If you would invest  50,100  in Lumber Futures on September 12, 2024 and sell it today you would earn a total of  6,350  from holding Lumber Futures or generate 12.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Orange Juice  vs.  Lumber Futures

Orange Juice

Risk-Adjusted Performance

4 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Orange Juice are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Orange Juice may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Lumber Futures

Risk-Adjusted Performance

10 of 100

OK

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

Pair Trading with Orange Juice and Lumber Futures

The main advantage of trading using opposite Orange Juice and Lumber Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Orange Juice 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 Orange Juice 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.

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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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.