Correlation Between Lumber Futures and Sugar

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

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

Diversification Opportunities for Lumber Futures and Sugar

-0.15

Correlation Coefficient

Lumber Futures  Sugar

Good diversification

The 3 months correlation between Lumber and Sugar is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Lumber Futures and Sugar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sugar 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 Sugar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sugar has no effect on the direction of Lumber Futures i.e., Lumber Futures and Sugar go up and down completely randomly.

Pair Corralation between Lumber Futures and Sugar

Assuming the 90 days horizon Lumber Futures is expected to generate 1.39 times more return on investment than Sugar. However, Lumber Futures is 1.39 times more volatile than Sugar. It trades about 0.14 of its potential returns per unit of risk. Sugar is currently generating about -0.22 per unit of risk. If you would invest  56,550  in Lumber Futures on October 20, 2024 and sell it today you would earn a total of  2,950  from holding Lumber Futures or generate 5.22% return on investment over 90 days.

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

Lumber Futures  vs.  Sugar

Lumber Futures

Risk-Adjusted Performance

9 of 100

OK

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

Sugar

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sugar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Commodity's basic indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for Sugar investors.

Pair Trading with Lumber Futures and Sugar

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

The idea behind Lumber Futures and Sugar 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.