Correlation Between Wheat Futures and Brent Crude

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

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

Diversification Opportunities for Wheat Futures and Brent Crude

0.59

Correlation Coefficient

Wheat Futures  Brent Crude

Very weak diversification

The 3 months correlation between Wheat and Brent is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Wheat Futures and Brent Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brent Crude Oil and Wheat 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 Wheat Futures are associated (or correlated) with Brent Crude. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brent Crude Oil has no effect on the direction of Wheat Futures i.e., Wheat Futures and Brent Crude go up and down completely randomly.

Pair Corralation between Wheat Futures and Brent Crude

Assuming the 90 days horizon Wheat Futures is expected to under-perform the Brent Crude. But the commodity apears to be less risky and, when comparing its historical volatility, Wheat Futures is 1.17 times less risky than Brent Crude. The commodity trades about -0.03 of its potential returns per unit of risk. The Brent Crude Oil is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  7,143  in Brent Crude Oil on September 12, 2024 and sell it today you would earn a total of  26.00  from holding Brent Crude Oil or generate 0.36% return on investment over 90 days.

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

Wheat Futures  vs.  Brent Crude Oil

Wheat Futures

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wheat Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Wheat Futures is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Brent Crude Oil

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Brent Crude Oil are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.

Pair Trading with Wheat Futures and Brent Crude

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

The idea behind Wheat Futures and Brent Crude Oil 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.