Correlation Between Crude Oil and Copper
Can any of the company-specific risk be diversified away by investing in both Crude Oil and Copper 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 Crude Oil and Copper into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Crude Oil and Copper, you can compare the effects of market volatilities on Crude Oil and Copper 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 Crude Oil with a short position of Copper. Check out your portfolio center. Please also check ongoing floating volatility patterns of Crude Oil and Copper.
Diversification Opportunities for Crude Oil and Copper
Weak diversification
The 3 months correlation between Crude and Copper is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Crude Oil and Copper in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Copper and Crude 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 Crude Oil are associated (or correlated) with Copper. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Copper has no effect on the direction of Crude Oil i.e., Crude Oil and Copper go up and down completely randomly.
Pair Corralation between Crude Oil and Copper
Assuming the 90 days horizon Crude Oil is expected to generate 0.95 times more return on investment than Copper. However, Crude Oil is 1.05 times less risky than Copper. It trades about 0.02 of its potential returns per unit of risk. Copper is currently generating about -0.11 per unit of risk. If you would invest 6,861 in Crude Oil on August 31, 2024 and sell it today you would earn a total of 27.00 from holding Crude Oil or generate 0.39% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 95.65% |
| Values | Daily Returns |
Crude Oil vs. Copper
Performance |
| Timeline |
| Crude Oil |
| Copper |
Crude Oil and Copper Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Crude Oil and Copper
The main advantage of trading using opposite Crude Oil and Copper positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Crude Oil position performs unexpectedly, Copper 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 Copper will offset losses from the drop in Copper's long position.The idea behind Crude Oil and Copper 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.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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..
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