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Maximising the returns has always been a key objective for investors. The possibility of combining several assets to modify the risk-return profile of a portfolio opens up many opportunities for researching the best assets allocation.
Considering previous studies, adding commodities to a diversified portfolio proved to provide further diversification to the portfolio, by improving the risk-return profile due to negative correlation between the two variables.
This study will focus on the diversification properties of oil futures in the market portfolio, the S&P 500, in the period 2009-2019 when the market was neither affected by the big financial crisis of 2008 nor Covid-19.
In the paper the analysis will be conducted through several methods including visual inspection of distribution of returns, joint distributions, portfolio allocation with Markowitz efficient frontier, DCC-GARCH correlation analysis, and copulas inspection. The different methods used allow to grasp both the linear correlation between the two variables as well as the lower and upper tail dependence.
The goal of the analysis is to understand if the negative correlation, that used to exist in the period before the big financial crisis of 2008, still holds.
The findings are: the two variables are positively correlated throughout the whole period of analysis, the correlation between the two is highly volatile and is lower when the oil futures or the S&P 500 are performing poorly, the two variables present strong lower tail dependence but very low upper tail dependence.
