Correlation Between 10 Year and Cotton
Can any of the company-specific risk be diversified away by investing in both 10 Year 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 10 Year and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between 10 Year T Note Futures and Cotton, you can compare the effects of market volatilities on 10 Year 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 10 Year with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of 10 Year and Cotton.
Diversification Opportunities for 10 Year and Cotton
Weak diversification
The 3 months correlation between ZNUSD and Cotton is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding 10 Year T Note Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and 10 Year 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 10 Year T Note 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 10 Year i.e., 10 Year and Cotton go up and down completely randomly.
Pair Corralation between 10 Year and Cotton
Assuming the 90 days horizon 10 Year T Note Futures is expected to under-perform the Cotton. But the commodity apears to be less risky and, when comparing its historical volatility, 10 Year T Note Futures is 3.24 times less risky than Cotton. The commodity trades about -0.33 of its potential returns per unit of risk. The Cotton is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest 7,409 in Cotton on August 25, 2024 and sell it today you would lose (332.00) from holding Cotton or give up 4.48% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
10 Year T Note Futures vs. Cotton
Performance |
| Timeline |
| 10 Year T |
| Cotton |
10 Year and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with 10 Year and Cotton
The main advantage of trading using opposite 10 Year and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 10 Year 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.The idea behind 10 Year T Note Futures and Cotton 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.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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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