Correlation Between Class III and Live Cattle

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

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

Diversification Opportunities for Class III and Live Cattle

0.0

Correlation Coefficient

Class III  Live Cattle

Pay attention - limited upside

The 3 months correlation between Class and Live is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Class III Milk and Live Cattle Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Live Cattle Futures and Class III 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 Class III Milk are associated (or correlated) with Live Cattle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Live Cattle Futures has no effect on the direction of Class III i.e., Class III and Live Cattle go up and down completely randomly.

Pair Corralation between Class III and Live Cattle

Assuming the 90 days horizon Class III Milk is expected to under-perform the Live Cattle. In addition to that, Class III is 1.82 times more volatile than Live Cattle Futures. It trades about -0.16 of its total potential returns per unit of risk. Live Cattle Futures is currently generating about 0.11 per unit of volatility. If you would invest  19,030  in Live Cattle Futures on December 28, 2024 and sell it today you would earn a total of  1,148  from holding Live Cattle Futures or generate 6.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	96.88%
Values	Daily Returns

Class III Milk  vs.  Live Cattle Futures

Class III Milk

Risk-Adjusted Performance

Very Weak

Over the last 90 days Class III Milk has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak 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 Class III Milk shareholders.

Live Cattle Futures

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Live Cattle Futures are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Live Cattle is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Class III and Live Cattle

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

The idea behind Class III Milk and Live Cattle 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.