Correlation Between Cocoa and Silver Futures

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

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

Diversification Opportunities for Cocoa and Silver Futures

-0.5

Correlation Coefficient

Cocoa  Silver Futures

Very good diversification

The 3 months correlation between Cocoa and Silver is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Silver Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Silver Futures 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 Silver Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Silver Futures has no effect on the direction of Cocoa i.e., Cocoa and Silver Futures go up and down completely randomly.

Pair Corralation between Cocoa and Silver Futures

Assuming the 90 days horizon Cocoa is expected to generate 2.52 times more return on investment than Silver Futures. However, Cocoa is 2.52 times more volatile than Silver Futures. It trades about 0.02 of its potential returns per unit of risk. Silver Futures is currently generating about 0.01 per unit of risk. If you would invest  903,800  in Cocoa on December 3, 2024 and sell it today you would lose (1,600) from holding Cocoa or give up 0.18% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Cocoa  vs.  Silver Futures

Cocoa

Risk-Adjusted Performance

Very 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.

Silver Futures

Risk-Adjusted Performance

Weak

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

Pair Trading with Cocoa and Silver Futures

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

The idea behind Cocoa and Silver Futures 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.