Correlation Between Cotton and Sugar

Can any of the company-specific risk be diversified away by investing in both Cotton and Sugar 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 Cotton and Sugar into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cotton and Sugar, you can compare the effects of market volatilities on Cotton and Sugar 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 Cotton with a short position of Sugar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Sugar.

Diversification Opportunities for Cotton and Sugar

0.57

Correlation Coefficient

Cotton  Sugar

Very weak diversification

The 3 months correlation between Cotton and Sugar is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Sugar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sugar and Cotton 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 Cotton are associated (or correlated) with Sugar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sugar has no effect on the direction of Cotton i.e., Cotton and Sugar go up and down completely randomly.

Pair Corralation between Cotton and Sugar

Assuming the 90 days horizon Cotton is expected to generate 0.97 times more return on investment than Sugar. However, Cotton is 1.03 times less risky than Sugar. It trades about 0.09 of its potential returns per unit of risk. Sugar is currently generating about -0.15 per unit of risk. If you would invest  7,017  in Cotton on September 2, 2024 and sell it today you would earn a total of  176.00  from holding Cotton or generate 2.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Cotton  vs.  Sugar

Cotton

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cotton are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Cotton is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Sugar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sugar are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Sugar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Cotton and Sugar

The main advantage of trading using opposite Cotton and Sugar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Sugar 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 Sugar will offset losses from the drop in Sugar's long position.

The idea behind Cotton and Sugar 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.

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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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.