Correlation Between Micro Silver and Cocoa

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

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

Diversification Opportunities for Micro Silver and Cocoa

-0.28

Correlation Coefficient

Micro Silver  Cocoa

Very good diversification

The 3 months correlation between Micro and Cocoa is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Micro Silver Futures and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Micro Silver 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 Micro Silver 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 Micro Silver i.e., Micro Silver and Cocoa go up and down completely randomly.

Pair Corralation between Micro Silver and Cocoa

Assuming the 90 days trading horizon Micro Silver is expected to generate 6.24 times less return on investment than Cocoa. But when comparing it to its historical volatility, Micro Silver Futures is 2.29 times less risky than Cocoa. It trades about 0.21 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 Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Micro Silver Futures  vs.  Cocoa

Micro Silver Futures

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Micro Silver Futures are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, Micro Silver may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 Micro Silver and Cocoa

The main advantage of trading using opposite Micro Silver and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro Silver 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 Micro Silver 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.