Correlation Between Lumber Futures and Wheat Futures

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

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

Diversification Opportunities for Lumber Futures and Wheat Futures

0.49

Correlation Coefficient

Lumber Futures  Wheat Futures

Very weak diversification

The 3 months correlation between Lumber and Wheat is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Lumber Futures and Wheat Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wheat 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 Wheat Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wheat Futures has no effect on the direction of Lumber Futures i.e., Lumber Futures and Wheat Futures go up and down completely randomly.

Pair Corralation between Lumber Futures and Wheat Futures

Assuming the 90 days horizon Lumber Futures is expected to generate 1.64 times less return on investment than Wheat Futures. In addition to that, Lumber Futures is 1.19 times more volatile than Wheat Futures. It trades about 0.09 of its total potential returns per unit of risk. Wheat Futures is currently generating about 0.17 per unit of volatility. If you would invest  52,075  in Wheat Futures on November 28, 2024 and sell it today you would earn a total of  8,475  from holding Wheat Futures or generate 16.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.72%
Values	Daily Returns

Lumber Futures  vs.  Wheat Futures

Lumber Futures

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Lumber Futures may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Wheat Futures

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Wheat Futures are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Wheat Futures showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lumber Futures and Wheat Futures

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

The idea behind Lumber Futures and Wheat 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.