Correlation Between Cotton and Palladium
Can any of the company-specific risk be diversified away by investing in both Cotton and Palladium 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 Palladium into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and Palladium, you can compare the effects of market volatilities on Cotton and Palladium 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 Palladium. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Palladium.
Diversification Opportunities for Cotton and Palladium
Very weak diversification
The 3 months correlation between Cotton and Palladium is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Palladium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Palladium 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 Palladium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Palladium has no effect on the direction of Cotton i.e., Cotton and Palladium go up and down completely randomly.
Pair Corralation between Cotton and Palladium
Assuming the 90 days horizon Cotton is expected to under-perform the Palladium. But the commodity apears to be less risky and, when comparing its historical volatility, Cotton is 1.93 times less risky than Palladium. The commodity trades about -0.15 of its potential returns per unit of risk. The Palladium is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 92,990 in Palladium on October 22, 2024 and sell it today you would earn a total of 3,720 from holding Palladium or generate 4.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 95.0% |
| Values | Daily Returns |
Cotton vs. Palladium
Performance |
| Timeline |
| Cotton |
| Palladium |
Cotton and Palladium Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and Palladium
The main advantage of trading using opposite Cotton and Palladium positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Palladium 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 Palladium will offset losses from the drop in Palladium's long position.The idea behind Cotton and Palladium 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.| Palladium vs. Aluminum Futures | Palladium vs. Gasoline RBOB | Palladium vs. Rough Rice Futures | Palladium vs. Micro Gold 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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