Correlation Between Micro E and Live Cattle

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

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

Diversification Opportunities for Micro E and Live Cattle

0.01

Correlation Coefficient

Micro E  Live Cattle

Significant diversification

The 3 months correlation between Micro and Live is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Micro E mini Russell and Live Cattle Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Live Cattle Futures and Micro E 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 Micro E mini Russell are associated (or correlated) with Live Cattle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Live Cattle Futures has no effect on the direction of Micro E i.e., Micro E and Live Cattle go up and down completely randomly.

Pair Corralation between Micro E and Live Cattle

Assuming the 90 days trading horizon Micro E mini Russell is expected to under-perform the Live Cattle. In addition to that, Micro E is 1.32 times more volatile than Live Cattle Futures. It trades about -0.13 of its total potential returns per unit of risk. Live Cattle Futures is currently generating about 0.11 per unit of volatility. 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	Insignificant
Accuracy	96.88%
Values	Daily Returns

Micro E mini Russell  vs.  Live Cattle Futures

Micro E mini

Risk-Adjusted Performance

Very Weak

Over the last 90 days Micro E mini Russell has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Commodity's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Micro E mini Russell shareholders.

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.

Pair Trading with Micro E and Live Cattle

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

The idea behind Micro E mini Russell and Live 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.

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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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.