Correlation Between Aluminum Futures and Soybean Futures

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

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

Diversification Opportunities for Aluminum Futures and Soybean Futures

0.25

Correlation Coefficient

Aluminum Futures  Soybean Futures

Modest diversification

The 3 months correlation between Aluminum and Soybean is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Aluminum Futures and Soybean Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Soybean Futures and Aluminum Futures 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 Aluminum Futures are associated (or correlated) with Soybean Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Soybean Futures has no effect on the direction of Aluminum Futures i.e., Aluminum Futures and Soybean Futures go up and down completely randomly.

Pair Corralation between Aluminum Futures and Soybean Futures

Assuming the 90 days trading horizon Aluminum Futures is expected to generate 1.42 times more return on investment than Soybean Futures. However, Aluminum Futures is 1.42 times more volatile than Soybean Futures. It trades about 0.4 of its potential returns per unit of risk. Soybean Futures is currently generating about 0.14 per unit of risk. If you would invest  225,800  in Aluminum Futures on July 8, 2024 and sell it today you would earn a total of  32,575  from holding Aluminum Futures or generate 14.43% return on investment over 90 days.

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

Aluminum Futures  vs.  Soybean Futures

Aluminum Futures

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Aluminum Futures are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. 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.

Soybean Futures

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Soybean Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Soybean Futures is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Aluminum Futures and Soybean Futures

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

The idea behind Aluminum Futures and Soybean 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.