Correlation Between 2 Year and Cotton
Can any of the company-specific risk be diversified away by investing in both 2 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 2 Year and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between 2 Year T Note Futures and Cotton, you can compare the effects of market volatilities on 2 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 2 Year with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of 2 Year and Cotton.
Diversification Opportunities for 2 Year and Cotton
Weak diversification
The 3 months correlation between ZTUSD and Cotton is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding 2 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 2 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 2 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 2 Year i.e., 2 Year and Cotton go up and down completely randomly.
Pair Corralation between 2 Year and Cotton
Assuming the 90 days horizon 2 Year T Note Futures is expected to generate 0.1 times more return on investment than Cotton. However, 2 Year T Note Futures is 10.26 times less risky than Cotton. It trades about 0.04 of its potential returns per unit of risk. Cotton is currently generating about -0.2 per unit of risk. If you would invest 10,280 in 2 Year T Note Futures on November 3, 2024 and sell it today you would earn a total of 8.00 from holding 2 Year T Note Futures or generate 0.08% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
2 Year T Note Futures vs. Cotton
Performance |
| Timeline |
| 2 Year T |
| Cotton |
2 Year and Cotton Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with 2 Year and Cotton
The main advantage of trading using opposite 2 Year and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 2 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.| 2 Year vs. Class III Milk | 2 Year vs. Live Cattle Futures | 2 Year vs. Heating Oil | 2 Year vs. Corn 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.
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