Correlation Between Copper and Aluminum Futures

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

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

Diversification Opportunities for Copper and Aluminum Futures

0.12

Correlation Coefficient

Copper  Aluminum Futures

Average diversification

The 3 months correlation between Copper and Aluminum is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Copper and Aluminum Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aluminum Futures and Copper 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 Copper are associated (or correlated) with Aluminum Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aluminum Futures has no effect on the direction of Copper i.e., Copper and Aluminum Futures go up and down completely randomly.

Pair Corralation between Copper and Aluminum Futures

Assuming the 90 days horizon Copper is expected to generate 1.36 times more return on investment than Aluminum Futures. However, Copper is 1.36 times more volatile than Aluminum Futures. It trades about 0.25 of its potential returns per unit of risk. Aluminum Futures is currently generating about -0.04 per unit of risk. If you would invest  409.00  in Copper on December 30, 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 Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Copper  vs.  Aluminum Futures

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.

Aluminum Futures

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Copper and Aluminum Futures

The main advantage of trading using opposite Copper and Aluminum Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Copper position performs unexpectedly, Aluminum Futures 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 Aluminum Futures will offset losses from the drop in Aluminum Futures' long position.

The idea behind Copper and Aluminum Futures 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.