Correlation Between Cocoa and Soybean Oil

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

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

Diversification Opportunities for Cocoa and Soybean Oil

0.1

Correlation Coefficient

Cocoa  Soybean Oil

Average diversification

The 3 months correlation between Cocoa and Soybean is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Soybean Oil Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Soybean Oil 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 Soybean Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Soybean Oil Futures has no effect on the direction of Cocoa i.e., Cocoa and Soybean Oil go up and down completely randomly.

Pair Corralation between Cocoa and Soybean Oil

Assuming the 90 days horizon Cocoa is expected to under-perform the Soybean Oil. In addition to that, Cocoa is 2.46 times more volatile than Soybean Oil Futures. It trades about -0.11 of its total potential returns per unit of risk. Soybean Oil Futures is currently generating about 0.08 per unit of volatility. If you would invest  3,947  in Soybean Oil Futures on December 26, 2024 and sell it today you would earn a total of  283.00  from holding Soybean Oil Futures or generate 7.17% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Cocoa  vs.  Soybean Oil Futures

Cocoa

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cocoa has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Commodity's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for Cocoa shareholders.

Soybean Oil Futures

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Soybean Oil Futures are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Soybean Oil may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Cocoa and Soybean Oil

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

The idea behind Cocoa and Soybean Oil 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 Commodity Directory module to find actively traded commodities issued by global exchanges.