Correlation Between Soybean Futures and Cotton
Can any of the company-specific risk be diversified away by investing in both Soybean 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 Soybean Futures and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Soybean Futures and Cotton, you can compare the effects of market volatilities on Soybean 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 Soybean Futures with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Soybean Futures and Cotton.
Diversification Opportunities for Soybean Futures and Cotton
0.42 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Soybean and Cotton is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Soybean Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Soybean 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 Soybean 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 Soybean Futures i.e., Soybean Futures and Cotton go up and down completely randomly.
Pair Corralation between Soybean Futures and Cotton
Assuming the 90 days horizon Soybean Futures is expected to under-perform the Cotton. But the commodity apears to be less risky and, when comparing its historical volatility, Soybean Futures is 1.37 times less risky than Cotton. The commodity trades about -0.02 of its potential returns per unit of risk. The Cotton is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 6,957 in Cotton on September 1, 2024 and sell it today you would earn a total of 238.00 from holding Cotton or generate 3.42% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 95.65% |
| Values | Daily Returns |
Soybean Futures vs. Cotton
Performance |
| Timeline |
| Soybean Futures |
| Cotton |
Soybean Futures and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Soybean Futures and Cotton
The main advantage of trading using opposite Soybean Futures and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Soybean 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.| Soybean Futures vs. Micro Silver Futures | Soybean Futures vs. 30 Day Fed | Soybean Futures vs. Mini Dow Jones | Soybean Futures vs. Gasoline RBOB |
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.
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