Correlation Between Nasdaq 100 and Cotton
Can any of the company-specific risk be diversified away by investing in both Nasdaq 100 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 Nasdaq 100 and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Nasdaq 100 and Cotton, you can compare the effects of market volatilities on Nasdaq 100 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 Nasdaq 100 with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nasdaq 100 and Cotton.
Diversification Opportunities for Nasdaq 100 and Cotton
0.16 | Correlation Coefficient |
Average diversification
The 3 months correlation between Nasdaq and Cotton is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq 100 and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Nasdaq 100 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 Nasdaq 100 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 Nasdaq 100 i.e., Nasdaq 100 and Cotton go up and down completely randomly.
Pair Corralation between Nasdaq 100 and Cotton
Assuming the 90 days horizon Nasdaq 100 is expected to generate 0.97 times more return on investment than Cotton. However, Nasdaq 100 is 1.03 times less risky than Cotton. It trades about 0.08 of its potential returns per unit of risk. Cotton is currently generating about -0.1 per unit of risk. If you would invest 2,016,775 in Nasdaq 100 on August 25, 2024 and sell it today you would earn a total of 69,150 from holding Nasdaq 100 or generate 3.43% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Nasdaq 100 vs. Cotton
Performance |
| Timeline |
| Nasdaq 100 |
| Cotton |
Nasdaq 100 and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Nasdaq 100 and Cotton
The main advantage of trading using opposite Nasdaq 100 and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq 100 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.| Nasdaq 100 vs. Soybean Futures | Nasdaq 100 vs. Palladium | Nasdaq 100 vs. Brent Crude Oil | Nasdaq 100 vs. Lean Hogs 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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