Correlation Between Lumber Futures and Lean Hogs

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

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

Diversification Opportunities for Lumber Futures and Lean Hogs

0.5

Correlation Coefficient

Lumber Futures  Lean Hogs

Very weak diversification

The 3 months correlation between Lumber and Lean is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Lumber Futures and Lean Hogs Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lean Hogs Futures and Lumber 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 Lumber Futures are associated (or correlated) with Lean Hogs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lean Hogs Futures has no effect on the direction of Lumber Futures i.e., Lumber Futures and Lean Hogs go up and down completely randomly.

Pair Corralation between Lumber Futures and Lean Hogs

Assuming the 90 days horizon Lumber Futures is expected to generate 1.32 times more return on investment than Lean Hogs. However, Lumber Futures is 1.32 times more volatile than Lean Hogs Futures. It trades about 0.19 of its potential returns per unit of risk. Lean Hogs Futures is currently generating about 0.08 per unit of risk. If you would invest  55,450  in Lumber Futures on December 29, 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

Lumber Futures  vs.  Lean Hogs Futures

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.

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.

Pair Trading with Lumber Futures and Lean Hogs

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

The idea behind Lumber Futures and Lean Hogs 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.