Correlation Between Live Cattle and Aluminum Futures

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

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

Diversification Opportunities for Live Cattle and Aluminum Futures

0.24

Correlation Coefficient

Live Cattle  Aluminum Futures

Modest diversification

The 3 months correlation between Live and Aluminum is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Live Cattle Futures and Aluminum Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aluminum Futures and Live Cattle 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 Live Cattle Futures are associated (or correlated) with Aluminum Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aluminum Futures has no effect on the direction of Live Cattle i.e., Live Cattle and Aluminum Futures go up and down completely randomly.

Pair Corralation between Live Cattle and Aluminum Futures

Assuming the 90 days horizon Live Cattle Futures is expected to generate 0.85 times more return on investment than Aluminum Futures. However, Live Cattle Futures is 1.18 times less risky than Aluminum Futures. It trades about 0.11 of its potential returns per unit of risk. Aluminum Futures is currently generating about -0.02 per unit of risk. If you would invest  19,030  in Live Cattle Futures on December 29, 2024 and sell it today you would earn a total of  1,148  from holding Live Cattle Futures or generate 6.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.88%
Values	Daily Returns

Live Cattle Futures  vs.  Aluminum Futures

Live Cattle Futures

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Live Cattle Futures are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Live Cattle is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Aluminum Futures

Risk-Adjusted Performance

Very Weak

Over the last 90 days Aluminum Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound forward indicators, Aluminum Futures is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Live Cattle and Aluminum Futures

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

The idea behind Live Cattle Futures and Aluminum 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.