Correlation Between Aluminum Futures and Sugar

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

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

Diversification Opportunities for Aluminum Futures and Sugar

0.02

Correlation Coefficient

Aluminum Futures  Sugar

Significant diversification

The 3 months correlation between Aluminum and Sugar is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Aluminum Futures and Sugar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sugar and Aluminum Futures 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 Aluminum Futures are associated (or correlated) with Sugar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sugar has no effect on the direction of Aluminum Futures i.e., Aluminum Futures and Sugar go up and down completely randomly.

Pair Corralation between Aluminum Futures and Sugar

Assuming the 90 days trading horizon Aluminum Futures is expected to under-perform the Sugar. But the commodity apears to be less risky and, when comparing its historical volatility, Aluminum Futures is 1.69 times less risky than Sugar. The commodity trades about -0.02 of its potential returns per unit of risk. The Sugar is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,913  in Sugar on December 29, 2024 and sell it today you would lose (7.00) from holding Sugar or give up 0.37% of portfolio value over 90 days.

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

Aluminum Futures  vs.  Sugar

Aluminum Futures

Risk-Adjusted Performance

Very Weak

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

Sugar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sugar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Sugar is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Aluminum Futures and Sugar

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

The idea behind Aluminum Futures and Sugar 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.