Correlation Between Micro E and Brent Crude

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

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

Diversification Opportunities for Micro E and Brent Crude

0.79

Correlation Coefficient

Micro E  Brent Crude

Poor diversification

The 3 months correlation between Micro and Brent is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Micro E mini Russell 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 Micro E 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 Micro E mini Russell 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 Micro E i.e., Micro E and Brent Crude go up and down completely randomly.

Pair Corralation between Micro E and Brent Crude

Assuming the 90 days trading horizon Micro E mini Russell is expected to under-perform the Brent Crude. But the commodity apears to be less risky and, when comparing its historical volatility, Micro E mini Russell is 1.11 times less risky than Brent Crude. The commodity trades about -0.13 of its potential returns per unit of risk. The Brent Crude Oil is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  7,399  in Brent Crude Oil on December 29, 2024 and sell it today you would lose (215.00) from holding Brent Crude Oil or give up 2.91% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Micro E mini Russell  vs.  Brent Crude Oil

Micro E mini

Risk-Adjusted Performance

Very Weak

Over the last 90 days Micro E mini Russell has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Commodity's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Micro E mini Russell shareholders.

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 Micro E and Brent Crude

The main advantage of trading using opposite Micro E and Brent Crude positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro E 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 Micro E mini Russell 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 Global Correlations module to find global opportunities by holding instruments from different markets.