Correlation Between Cotton and Five Year
Can any of the company-specific risk be diversified away by investing in both Cotton and Five Year 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 Five Year into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and Five Year Treasury Note, you can compare the effects of market volatilities on Cotton and Five Year 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 Five Year. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Five Year.
Diversification Opportunities for Cotton and Five Year
Poor diversification
The 3 months correlation between Cotton and Five is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Five Year Treasury Note in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Five Year Treasury 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 Five Year. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Five Year Treasury has no effect on the direction of Cotton i.e., Cotton and Five Year go up and down completely randomly.
Pair Corralation between Cotton and Five Year
Assuming the 90 days horizon Cotton is expected to under-perform the Five Year. In addition to that, Cotton is 3.92 times more volatile than Five Year Treasury Note. It trades about -0.2 of its total potential returns per unit of risk. Five Year Treasury Note is currently generating about 0.01 per unit of volatility. If you would invest 10,634 in Five Year Treasury Note on November 3, 2024 and sell it today you would earn a total of 5.00 from holding Five Year Treasury Note or generate 0.05% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cotton vs. Five Year Treasury Note
Performance |
| Timeline |
| Cotton |
| Five Year Treasury |
Cotton and Five Year Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and Five Year
The main advantage of trading using opposite Cotton and Five Year positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Five Year 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 Five Year will offset losses from the drop in Five Year's long position.The idea behind Cotton and Five Year Treasury Note 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.| Five Year vs. Mini Dow Jones | Five Year vs. Gasoline RBOB | Five Year vs. Rough Rice Futures | Five Year vs. Platinum |
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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.
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