Correlation Between Cotton and Lean Hogs
Can any of the company-specific risk be diversified away by investing in both Cotton and Lean Hogs 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 Cotton and Lean Hogs into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and Lean Hogs Futures, you can compare the effects of market volatilities on Cotton and Lean Hogs 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 Cotton with a short position of Lean Hogs. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Lean Hogs.
Diversification Opportunities for Cotton and Lean Hogs
Weak diversification
The 3 months correlation between Cotton and Lean is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Lean Hogs Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lean Hogs Futures and Cotton 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 Cotton are associated (or correlated) with Lean Hogs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lean Hogs Futures has no effect on the direction of Cotton i.e., Cotton and Lean Hogs go up and down completely randomly.
Pair Corralation between Cotton and Lean Hogs
Assuming the 90 days horizon Cotton is expected to generate 1.61 times less return on investment than Lean Hogs. But when comparing it to its historical volatility, Cotton is 1.18 times less risky than Lean Hogs. It trades about 0.08 of its potential returns per unit of risk. Lean Hogs Futures is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 8,063 in Lean Hogs Futures on August 29, 2024 and sell it today you would earn a total of 247.00 from holding Lean Hogs Futures or generate 3.06% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cotton vs. Lean Hogs Futures
Performance |
| Timeline |
| Cotton |
| Lean Hogs Futures |
Cotton and Lean Hogs Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and Lean Hogs
The main advantage of trading using opposite Cotton and Lean Hogs positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Lean Hogs 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 Lean Hogs will offset losses from the drop in Lean Hogs' long position.| Cotton vs. 10 Year T Note Futures | Cotton vs. Nasdaq 100 | Cotton vs. Oat Futures | Cotton vs. Wheat Futures |
| Lean Hogs vs. 2 Year T Note Futures | Lean Hogs vs. Heating Oil | Lean Hogs vs. Crude Oil | Lean Hogs vs. Aluminum 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.
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