Correlation Between Wheat Futures and Soybean Futures

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

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

Diversification Opportunities for Wheat Futures and Soybean Futures

0.55

Correlation Coefficient

Wheat Futures  Soybean Futures

Very weak diversification

The 3 months correlation between Wheat and Soybean is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Wheat Futures and Soybean Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Soybean Futures 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 Soybean Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Soybean Futures has no effect on the direction of Wheat Futures i.e., Wheat Futures and Soybean Futures go up and down completely randomly.

Pair Corralation between Wheat Futures and Soybean Futures

Assuming the 90 days horizon Wheat Futures is expected to generate 1.45 times more return on investment than Soybean Futures. However, Wheat Futures is 1.45 times more volatile than Soybean Futures. It trades about 0.03 of its potential returns per unit of risk. Soybean Futures is currently generating about 0.02 per unit of risk. If you would invest  55,150  in Wheat Futures on December 26, 2024 and sell it today you would earn a total of  1,350  from holding Wheat Futures or generate 2.45% return on investment over 90 days.

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

Wheat Futures  vs.  Soybean Futures

Wheat Futures

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Wheat Futures are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Wheat Futures is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Soybean Futures

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Soybean Futures are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Soybean Futures is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Wheat Futures and Soybean Futures

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

The idea behind Wheat Futures and Soybean 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.

Check out your portfolio center.

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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.