Correlation Between Orange Juice and Cocoa

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

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

Diversification Opportunities for Orange Juice and Cocoa

0.77

Correlation Coefficient

Orange Juice  Cocoa

Poor diversification

The 3 months correlation between Orange and Cocoa is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Orange Juice and Cocoa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cocoa and Orange Juice 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 Orange Juice are associated (or correlated) with Cocoa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cocoa has no effect on the direction of Orange Juice i.e., Orange Juice and Cocoa go up and down completely randomly.

Pair Corralation between Orange Juice and Cocoa

Assuming the 90 days horizon Orange Juice is expected to under-perform the Cocoa. But the commodity apears to be less risky and, when comparing its historical volatility, Orange Juice is 1.73 times less risky than Cocoa. The commodity trades about -0.33 of its potential returns per unit of risk. The Cocoa is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  940,100  in Cocoa on December 4, 2024 and sell it today you would lose (91,200) from holding Cocoa or give up 9.7% of portfolio value over 90 days.

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

Orange Juice  vs.  Cocoa

Orange Juice

Risk-Adjusted Performance

Very Weak

Over the last 90 days Orange Juice 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 April 2025. The current disturbance may also be a sign of long term up-swing for Orange Juice investors.

Cocoa

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Orange Juice and Cocoa

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

The idea behind Orange Juice and Cocoa 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.