Correlation Between Silver Futures and Cotton

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

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

Diversification Opportunities for Silver Futures and Cotton

-0.49

Correlation Coefficient

Silver Futures  Cotton

Very good diversification

The 3 months correlation between Silver and Cotton is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Silver Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Silver 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 Silver 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 Silver Futures i.e., Silver Futures and Cotton go up and down completely randomly.

Pair Corralation between Silver Futures and Cotton

Assuming the 90 days horizon Silver Futures is expected to generate 1.35 times more return on investment than Cotton. However, Silver Futures is 1.35 times more volatile than Cotton. It trades about 0.19 of its potential returns per unit of risk. Cotton is currently generating about -0.03 per unit of risk. If you would invest  2,941  in Silver Futures on December 29, 2024 and sell it today you would earn a total of  539.00  from holding Silver Futures or generate 18.33% return on investment over 90 days.

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

Silver Futures  vs.  Cotton

Silver Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Silver Futures are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Silver Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

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 Silver Futures and Cotton

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

The idea behind Silver 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.

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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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.