Correlation Between Cocoa and Cotton
Can any of the company-specific risk be diversified away by investing in both Cocoa and Cotton 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 Cocoa and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cocoa and Cotton, you can compare the effects of market volatilities on Cocoa and Cotton 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 Cocoa with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cocoa and Cotton.
Diversification Opportunities for Cocoa and Cotton
Excellent diversification
The 3 months correlation between Cocoa and Cotton is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Cocoa and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Cocoa 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 Cocoa are associated (or correlated) with Cotton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cotton has no effect on the direction of Cocoa i.e., Cocoa and Cotton go up and down completely randomly.
Pair Corralation between Cocoa and Cotton
Assuming the 90 days horizon Cocoa is expected to under-perform the Cotton. In addition to that, Cocoa is 5.62 times more volatile than Cotton. It trades about -0.03 of its total potential returns per unit of risk. Cotton is currently generating about -0.15 per unit of volatility. If you would invest 6,942 in Cotton on October 22, 2024 and sell it today you would lose (186.00) from holding Cotton or give up 2.68% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cocoa vs. Cotton
Performance |
| Timeline |
| Cocoa |
| Cotton |
Cocoa and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cocoa and Cotton
The main advantage of trading using opposite Cocoa and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cocoa position performs unexpectedly, Cotton 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 Cotton will offset losses from the drop in Cotton's long position.| Cocoa vs. Corn Futures | Cocoa vs. 2 Year T Note Futures | Cocoa vs. Silver Futures | Cocoa vs. Live Cattle Futures |
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 Transaction History module to view history of all your transactions and understand their impact on performance.
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