Improved diversification through a mix of oil and equities

Abstract

This study presents evidence of a statistically significant negative correlation between crude oil and equities over the past 20 years. Including proper proportions of negatively correlated assets in a diversified portfolio can improve the ratio of reward relative to risk, and therefore, adding crude oil with equities into a diversified portfolio can provide superior portfolio performance, compared with equities alone. Because crude oil prices held stable for nearly a century before the oil crisis of 1973, and oil derivatives did not begin trading actively on public markets until the 1980s, the diversification value of oil is a relatively new phenomenon. Also contributing to the phenomenon, the majority of oil reserves and the majority of crude oil production capacity worldwide are held by entities that are not traded in public equity markets, and therefore, the diversification benefits of oil cannot be fully realized by holding a portion of the global market portfolio of equities.

Citation

Xu, H. (2010), "Improved diversification through a mix of oil and equities", Kensinger, J.W. (Ed.) Research in Finance (Research in Finance, Vol. 26), Emerald Group Publishing Limited, Leeds, pp. 113-126. https://doi.org/10.1108/S0196-3821(2010)0000026008