Correlation Between Brent Crude and Copper

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

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

Diversification Opportunities for Brent Crude and Copper

-0.59

Correlation Coefficient

Brent Crude  Copper

Excellent diversification

The 3 months correlation between Brent and Copper is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Brent Crude Oil and Copper in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Copper and Brent Crude 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 Brent 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 Brent Crude i.e., Brent Crude and Copper go up and down completely randomly.

Pair Corralation between Brent Crude and Copper

Assuming the 90 days horizon Brent Crude Oil is expected to under-perform the Copper. But the commodity apears to be less risky and, when comparing its historical volatility, Brent Crude Oil is 1.11 times less risky than Copper. The commodity trades about -0.01 of its potential returns per unit of risk. The Copper is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  409.00  in Copper on December 28, 2024 and sell it today you would earn a total of  102.00  from holding Copper or generate 24.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Brent Crude Oil  vs.  Copper

Brent Crude Oil

Risk-Adjusted Performance

Very Weak

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

Copper

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Copper are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Copper exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Brent Crude and Copper

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

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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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.