Correlation Between Lean Hogs and Lumber Futures

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

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

Diversification Opportunities for Lean Hogs and Lumber Futures

0.44

Correlation Coefficient

Lean Hogs  Lumber Futures

Very weak diversification

The 3 months correlation between Lean and Lumber is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Lean Hogs Futures and Lumber Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumber Futures and Lean Hogs 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 Lean Hogs Futures are associated (or correlated) with Lumber Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumber Futures has no effect on the direction of Lean Hogs i.e., Lean Hogs and Lumber Futures go up and down completely randomly.

Pair Corralation between Lean Hogs and Lumber Futures

Assuming the 90 days horizon Lean Hogs is expected to generate 3.24 times less return on investment than Lumber Futures. But when comparing it to its historical volatility, Lean Hogs Futures is 1.32 times less risky than Lumber Futures. It trades about 0.08 of its potential returns per unit of risk. Lumber Futures is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  55,450  in Lumber Futures on December 30, 2024 and sell it today you would earn a total of  12,550  from holding Lumber Futures or generate 22.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Lean Hogs Futures  vs.  Lumber Futures

Lean Hogs Futures

Risk-Adjusted Performance

Modest

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

Lumber Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lumber Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lean Hogs and Lumber Futures

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

The idea behind Lean Hogs Futures and Lumber 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.