Correlation Between Cotton and Wheat Futures
Can any of the company-specific risk be diversified away by investing in both Cotton and Wheat 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 Cotton and Wheat Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and Wheat Futures, you can compare the effects of market volatilities on Cotton and Wheat 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 Cotton with a short position of Wheat Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Wheat Futures.
Diversification Opportunities for Cotton and Wheat Futures
-0.34 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Cotton and Wheat is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Wheat Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wheat 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 Wheat Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wheat Futures has no effect on the direction of Cotton i.e., Cotton and Wheat Futures go up and down completely randomly.
Pair Corralation between Cotton and Wheat Futures
Assuming the 90 days horizon Cotton is expected to generate 10.36 times less return on investment than Wheat Futures. But when comparing it to its historical volatility, Cotton is 1.81 times less risky than Wheat Futures. It trades about 0.04 of its potential returns per unit of risk. Wheat Futures is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest 55,325 in Wheat Futures on November 27, 2024 and sell it today you would earn a total of 5,625 from holding Wheat Futures or generate 10.17% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cotton vs. Wheat Futures
Performance |
| Timeline |
| Cotton |
| Wheat Futures |
Cotton and Wheat Futures Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and Wheat Futures
The main advantage of trading using opposite Cotton and Wheat Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Wheat 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 Wheat Futures will offset losses from the drop in Wheat Futures' long position.The idea behind Cotton and Wheat 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.| Wheat Futures vs. 30 Year Treasury | Wheat Futures vs. Natural Gas | Wheat Futures vs. Crude Oil | Wheat Futures vs. Soybean 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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