Correlation Between Lumber Futures and Brent Crude

Can any of the company-specific risk be diversified away by investing in both Lumber 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 Lumber 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 Lumber Futures and Brent Crude Oil, you can compare the effects of market volatilities on Lumber 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 Lumber Futures with a short position of Brent Crude. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lumber Futures and Brent Crude.

Diversification Opportunities for Lumber Futures and Brent Crude

-0.72

Correlation Coefficient

Lumber Futures  Brent Crude

Pay attention - limited upside

The 3 months correlation between Lumber and Brent is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Lumber 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 Lumber 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 Lumber 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 Lumber Futures i.e., Lumber Futures and Brent Crude go up and down completely randomly.

Pair Corralation between Lumber Futures and Brent Crude

Assuming the 90 days horizon Lumber Futures is expected to generate 1.4 times more return on investment than Brent Crude. However, Lumber Futures is 1.4 times more volatile than Brent Crude Oil. It trades about 0.19 of its potential returns per unit of risk. Brent Crude Oil is currently generating about -0.03 per unit of risk. If you would invest  55,450  in Lumber Futures on December 29, 2024 and sell it today you would earn a total of  12,550  from holding Lumber Futures or generate 22.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	96.88%
Values	Daily Returns

Lumber Futures  vs.  Brent Crude Oil

Lumber Futures

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lumber Futures are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lumber Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Lumber Futures and Brent Crude

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

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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.