Correlation Between Cocoa and Sugar

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

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

Diversification Opportunities for Cocoa and Sugar

0.0

Correlation Coefficient

Cocoa  Sugar

Pay attention - limited upside

The 3 months correlation between Cocoa and Sugar is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Sugar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sugar and Cocoa 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 Cocoa 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 Cocoa i.e., Cocoa and Sugar go up and down completely randomly.

Pair Corralation between Cocoa and Sugar

Assuming the 90 days horizon Cocoa is expected to generate 3.57 times more return on investment than Sugar. However, Cocoa is 3.57 times more volatile than Sugar. It trades about -0.06 of its potential returns per unit of risk. Sugar is currently generating about -0.23 per unit of risk. If you would invest  1,210,700  in Cocoa on October 20, 2024 and sell it today you would lose (93,400) from holding Cocoa or give up 7.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Cocoa  vs.  Sugar

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 unsteady basic indicators, Cocoa exhibited solid returns over the last few months and may actually be approaching a breakup point.

Sugar

Risk-Adjusted Performance

0 of 100

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 current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Cocoa and Sugar

The main advantage of trading using opposite Cocoa and Sugar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa 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 Cocoa 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.