Correlation Between Brent Crude and Cocoa

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

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

Diversification Opportunities for Brent Crude and Cocoa

0.28

Correlation Coefficient

Brent Crude  Cocoa

Modest diversification

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

Pair Corralation between Brent Crude and Cocoa

Assuming the 90 days horizon Brent Crude Oil is expected to generate 0.31 times more return on investment than Cocoa. However, Brent Crude Oil is 3.19 times less risky than Cocoa. It trades about 0.06 of its potential returns per unit of risk. Cocoa is currently generating about 0.02 per unit of risk. If you would invest  7,150  in Brent Crude Oil on November 28, 2024 and sell it today you would earn a total of  323.00  from holding Brent Crude Oil or generate 4.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.41%
Values	Daily Returns

Brent Crude Oil  vs.  Cocoa

Brent Crude Oil

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Brent Crude Oil are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Brent Crude 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

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Cocoa are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Cocoa is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Brent Crude and Cocoa

The main advantage of trading using opposite Brent Crude and Cocoa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Brent Crude 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 Brent Crude Oil 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.