Correlation Between Wheat Futures and Orange Juice

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

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

Diversification Opportunities for Wheat Futures and Orange Juice

-0.6

Correlation Coefficient

Wheat Futures  Orange Juice

Excellent diversification

The 3 months correlation between Wheat and Orange is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Wheat Futures and Orange Juice in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Orange Juice and Wheat Futures 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 Wheat Futures are associated (or correlated) with Orange Juice. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Orange Juice has no effect on the direction of Wheat Futures i.e., Wheat Futures and Orange Juice go up and down completely randomly.

Pair Corralation between Wheat Futures and Orange Juice

Assuming the 90 days horizon Wheat Futures is expected to generate 0.58 times more return on investment than Orange Juice. However, Wheat Futures is 1.72 times less risky than Orange Juice. It trades about 0.07 of its potential returns per unit of risk. Orange Juice is currently generating about -0.33 per unit of risk. If you would invest  55,100  in Wheat Futures on December 21, 2024 and sell it today you would earn a total of  3,550  from holding Wheat Futures or generate 6.44% return on investment over 90 days.

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

Wheat Futures  vs.  Orange Juice

Wheat Futures

Risk-Adjusted Performance

Modest

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

Orange Juice

Risk-Adjusted Performance

Very Weak

Over the last 90 days Orange Juice 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 fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for Orange Juice investors.

Pair Trading with Wheat Futures and Orange Juice

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

The idea behind Wheat Futures and Orange Juice 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.