Correlation Between Coffee and Rough Rice

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

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

Diversification Opportunities for Coffee and Rough Rice

-0.61

Correlation Coefficient

Coffee  Rough Rice

Excellent diversification

The 3 months correlation between Coffee and Rough is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Coffee and Rough Rice Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rough Rice Futures and Coffee 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 Coffee are associated (or correlated) with Rough Rice. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rough Rice Futures has no effect on the direction of Coffee i.e., Coffee and Rough Rice go up and down completely randomly.

Pair Corralation between Coffee and Rough Rice

Assuming the 90 days horizon Coffee is expected to generate 1.88 times more return on investment than Rough Rice. However, Coffee is 1.88 times more volatile than Rough Rice Futures. It trades about 0.13 of its potential returns per unit of risk. Rough Rice Futures is currently generating about -0.03 per unit of risk. If you would invest  32,100  in Coffee on December 29, 2024 and sell it today you would earn a total of  5,860  from holding Coffee or generate 18.26% return on investment over 90 days.

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

Coffee  vs.  Rough Rice Futures

Coffee

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Coffee are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Coffee showed solid returns over the last few months and may actually be approaching a breakup point.

Rough Rice Futures

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Coffee and Rough Rice

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

The idea behind Coffee and Rough Rice 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.