Correlation Between 10 Year and Cocoa

Can any of the company-specific risk be diversified away by investing in both 10 Year 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 10 Year and Cocoa into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 10 Year T Note Futures and Cocoa, you can compare the effects of market volatilities on 10 Year 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 10 Year with a short position of Cocoa. Check out your portfolio center. Please also check ongoing floating volatility patterns of 10 Year and Cocoa.

Diversification Opportunities for 10 Year and Cocoa

-0.26

Correlation Coefficient

10 Year  Cocoa

Very good diversification

The 3 months correlation between ZNUSD and Cocoa is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding 10 Year T Note Futures and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and 10 Year 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 10 Year T Note 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 10 Year i.e., 10 Year and Cocoa go up and down completely randomly.

Pair Corralation between 10 Year and Cocoa

Assuming the 90 days horizon 10 Year T Note Futures is expected to under-perform the Cocoa. But the commodity apears to be less risky and, when comparing its historical volatility, 10 Year T Note Futures is 10.24 times less risky than Cocoa. The commodity trades about -0.2 of its potential returns per unit of risk. The Cocoa is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  758,800  in Cocoa on September 12, 2024 and sell it today you would earn a total of  291,900  from holding Cocoa or generate 38.47% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

10 Year T Note Futures  vs.  Cocoa

10 Year T

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days 10 Year T Note Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, 10 Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Cocoa

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cocoa are ranked lower than 13 (%) 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.

Pair Trading with 10 Year and Cocoa

The main advantage of trading using opposite 10 Year and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 10 Year 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 10 Year T Note 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.