Correlation Between Wheat Futures and Cotton
Can any of the company-specific risk be diversified away by investing in both Wheat 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 Wheat Futures and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Wheat Futures and Cotton, you can compare the effects of market volatilities on Wheat 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 Wheat Futures with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wheat Futures and Cotton.
Diversification Opportunities for Wheat Futures and Cotton
-0.34 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Wheat and Cotton is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Wheat Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Wheat 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 Wheat 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 Wheat Futures i.e., Wheat Futures and Cotton go up and down completely randomly.
Pair Corralation between Wheat Futures and Cotton
Assuming the 90 days horizon Wheat Futures is expected to generate 1.81 times more return on investment than Cotton. However, Wheat Futures is 1.81 times more volatile than Cotton. It trades about 0.25 of its potential returns per unit of risk. Cotton is currently generating about 0.04 per unit of risk. If you would invest 55,325 in Wheat Futures on November 27, 2024 and sell it today you would earn a total of 5,625 from holding Wheat Futures or generate 10.17% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Wheat Futures vs. Cotton
Performance |
| Timeline |
| Wheat Futures |
| Cotton |
Wheat Futures and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Wheat Futures and Cotton
The main advantage of trading using opposite Wheat Futures and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Wheat 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.| Wheat Futures vs. 30 Year Treasury | Wheat Futures vs. Natural Gas | Wheat Futures vs. Crude Oil | Wheat Futures vs. Soybean 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.
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