Correlation Between Live Cattle and Natural Gas

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

Diversification Opportunities for Live Cattle and Natural Gas

0.41

Correlation Coefficient

Live Cattle  Natural Gas

Very weak diversification

The 3 months correlation between Live and Natural is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Live Cattle Futures and Natural Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natural Gas 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 Natural Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natural Gas has no effect on the direction of Live Cattle i.e., Live Cattle and Natural Gas go up and down completely randomly.

Pair Corralation between Live Cattle and Natural Gas

Assuming the 90 days horizon Live Cattle is expected to generate 2.74 times less return on investment than Natural Gas. But when comparing it to its historical volatility, Live Cattle Futures is 8.36 times less risky than Natural Gas. It trades about 0.29 of its potential returns per unit of risk. Natural Gas is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  308.00  in Natural Gas on October 7, 2024 and sell it today you would earn a total of  27.00  from holding Natural Gas or generate 8.77% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.24%
Values	Daily Returns

Live Cattle Futures  vs.  Natural Gas

Live Cattle Futures

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Live Cattle Futures are ranked lower than 7 (%) 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.

Natural Gas

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Gas are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Natural Gas exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Live Cattle and Natural Gas

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

The idea behind Live Cattle Futures and Natural Gas 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.