Correlation Between Heating Oil and Cotton

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

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

Diversification Opportunities for Heating Oil and Cotton

0.34

Correlation Coefficient

Heating Oil  Cotton

Weak diversification

The 3 months correlation between Heating and Cotton is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Heating Oil and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Heating Oil 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 Heating Oil 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 Heating Oil i.e., Heating Oil and Cotton go up and down completely randomly.

Pair Corralation between Heating Oil and Cotton

Assuming the 90 days horizon Heating Oil is expected to under-perform the Cotton. In addition to that, Heating Oil is 1.43 times more volatile than Cotton. It trades about -0.02 of its total potential returns per unit of risk. Cotton is currently generating about -0.03 per unit of volatility. If you would invest  6,848  in Cotton on December 29, 2024 and sell it today you would lose (159.00) from holding Cotton or give up 2.32% of portfolio value over 90 days.

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

Heating Oil  vs.  Cotton

Heating Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Heating Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Heating Oil is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Cotton

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cotton has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Pair Trading with Heating Oil and Cotton

The main advantage of trading using opposite Heating Oil and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Heating Oil 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 Heating Oil 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.

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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 Transaction History module to view history of all your transactions and understand their impact on performance.