Correlation Between Cotton and Live Cattle
Can any of the company-specific risk be diversified away by investing in both Cotton 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 Cotton and Live Cattle into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and Live Cattle Futures, you can compare the effects of market volatilities on Cotton 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 Cotton with a short position of Live Cattle. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Live Cattle.
Diversification Opportunities for Cotton and Live Cattle
0.28 | Correlation Coefficient |
Modest diversification
The 3 months correlation between Cotton and Live is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Cotton 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 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 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 Cotton i.e., Cotton and Live Cattle go up and down completely randomly.
Pair Corralation between Cotton and Live Cattle
Assuming the 90 days horizon Cotton is expected to under-perform the Live Cattle. In addition to that, Cotton is 1.64 times more volatile than Live Cattle Futures. It trades about -0.09 of its total potential returns per unit of risk. Live Cattle Futures is currently generating about 0.01 per unit of volatility. If you would invest 18,800 in Live Cattle Futures on September 1, 2024 and sell it today you would earn a total of 63.00 from holding Live Cattle Futures or generate 0.34% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 98.44% |
| Values | Daily Returns |
Cotton vs. Live Cattle Futures
Performance |
| Timeline |
| Cotton |
| Live Cattle Futures |
Cotton and Live Cattle Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and Live Cattle
The main advantage of trading using opposite Cotton and Live Cattle positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton 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 Cotton 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.| Live Cattle vs. Cocoa | Live Cattle vs. E Mini SP 500 | Live Cattle vs. Cotton | Live Cattle vs. Class III Milk |
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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