Correlation Between Cotton and 2 Year
Can any of the company-specific risk be diversified away by investing in both Cotton and 2 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 2 Year into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Cotton and 2 Year T Note Futures, you can compare the effects of market volatilities on Cotton and 2 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 2 Year. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and 2 Year.
Diversification Opportunities for Cotton and 2 Year
Poor diversification
The 3 months correlation between Cotton and ZTUSD is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and 2 Year T Note Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 2 Year T 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 2 Year. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 2 Year T has no effect on the direction of Cotton i.e., Cotton and 2 Year go up and down completely randomly.
Pair Corralation between Cotton and 2 Year
Assuming the 90 days horizon Cotton is expected to under-perform the 2 Year. In addition to that, Cotton is 13.56 times more volatile than 2 Year T Note Futures. It trades about -0.02 of its total potential returns per unit of risk. 2 Year T Note Futures is currently generating about 0.11 per unit of volatility. If you would invest 10,268 in 2 Year T Note Futures on September 19, 2024 and sell it today you would earn a total of 18.00 from holding 2 Year T Note Futures or generate 0.18% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Cotton vs. 2 Year T Note Futures
Performance |
| Timeline |
| Cotton |
| 2 Year T |
Cotton and 2 Year Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Cotton and 2 Year
The main advantage of trading using opposite Cotton and 2 Year positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, 2 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 2 Year will offset losses from the drop in 2 Year's long position.| Cotton vs. Gold Futures | Cotton vs. Soybean Meal Futures | Cotton vs. Sugar | Cotton vs. 10 Year T Note 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.
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