Correlation Between Live Cattle and Feeder Cattle

Can any of the company-specific risk be diversified away by investing in both Live Cattle and Feeder Cattle 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 Feeder Cattle 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 Feeder Cattle Futures, you can compare the effects of market volatilities on Live Cattle and Feeder Cattle 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 Feeder Cattle. Check out your portfolio center. Please also check ongoing floating volatility patterns of Live Cattle and Feeder Cattle.

Diversification Opportunities for Live Cattle and Feeder Cattle

0.65

Correlation Coefficient

Live Cattle  Feeder Cattle

Poor diversification

The 3 months correlation between Live and Feeder is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Live Cattle Futures and Feeder Cattle Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Feeder Cattle 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 Feeder Cattle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Feeder Cattle Futures has no effect on the direction of Live Cattle i.e., Live Cattle and Feeder Cattle go up and down completely randomly.

Pair Corralation between Live Cattle and Feeder Cattle

Assuming the 90 days horizon Live Cattle is expected to generate 1.55 times less return on investment than Feeder Cattle. In addition to that, Live Cattle is 1.07 times more volatile than Feeder Cattle Futures. It trades about 0.11 of its total potential returns per unit of risk. Feeder Cattle Futures is currently generating about 0.18 per unit of volatility. If you would invest  26,163  in Feeder Cattle Futures on December 28, 2024 and sell it today you would earn a total of  2,530  from holding Feeder Cattle Futures or generate 9.67% return on investment over 90 days.

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

Live Cattle Futures  vs.  Feeder Cattle 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.

Feeder Cattle Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Feeder Cattle Futures are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Feeder Cattle may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Live Cattle and Feeder Cattle

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

The idea behind Live Cattle Futures and Feeder Cattle 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.