Correlation Between Rough Rice and Cotton

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

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

Diversification Opportunities for Rough Rice and Cotton

0.54

Correlation Coefficient

Rough Rice  Cotton

Very weak diversification

The 3 months correlation between Rough and Cotton is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Rough Rice Futures and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and Rough Rice 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 Rough Rice 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 Rough Rice i.e., Rough Rice and Cotton go up and down completely randomly.

Pair Corralation between Rough Rice and Cotton

Assuming the 90 days horizon Rough Rice Futures is expected to generate 0.79 times more return on investment than Cotton. However, Rough Rice Futures is 1.26 times less risky than Cotton. It trades about 0.04 of its potential returns per unit of risk. Cotton is currently generating about 0.02 per unit of risk. If you would invest  1,494  in Rough Rice Futures on September 3, 2024 and sell it today you would earn a total of  35.00  from holding Rough Rice Futures or generate 2.34% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

Rough Rice Futures  vs.  Cotton

Rough Rice Futures

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Rough Rice Futures are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Rough Rice is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Cotton

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Cotton are ranked lower than 1 (%) 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.

Pair Trading with Rough Rice and Cotton

The main advantage of trading using opposite Rough Rice and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rough Rice 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 Rough Rice 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.