Correlation Between Gold Futures and Cotton
Can any of the company-specific risk be diversified away by investing in both Gold Futures and Cotton 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 Gold Futures and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Gold Futures and Cotton, you can compare the effects of market volatilities on Gold Futures and Cotton 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 Gold Futures with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Gold Futures and Cotton.
Diversification Opportunities for Gold Futures and Cotton
-0.04 | Correlation Coefficient |
Good diversification
The 3 months correlation between Gold and Cotton is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Gold Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Gold Futures 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 Gold Futures are associated (or correlated) with Cotton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cotton has no effect on the direction of Gold Futures i.e., Gold Futures and Cotton go up and down completely randomly.
Pair Corralation between Gold Futures and Cotton
Assuming the 90 days horizon Gold Futures is expected to generate 0.66 times more return on investment than Cotton. However, Gold Futures is 1.52 times less risky than Cotton. It trades about 0.1 of its potential returns per unit of risk. Cotton is currently generating about -0.04 per unit of risk. If you would invest 199,490 in Gold Futures on September 19, 2024 and sell it today you would earn a total of 61,430 from holding Gold Futures or generate 30.79% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 98.66% |
| Values | Daily Returns |
Gold Futures vs. Cotton
Performance |
| Timeline |
| Gold Futures |
| Cotton |
Gold Futures and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Gold Futures and Cotton
The main advantage of trading using opposite Gold Futures and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Gold Futures position performs unexpectedly, Cotton 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 Cotton will offset losses from the drop in Cotton's long position.| Gold Futures vs. Cotton | Gold Futures vs. Cocoa | Gold Futures vs. Micro Gold Futures | Gold Futures vs. Natural Gas |
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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.
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