Correlation Between MicroSectors Solactive and Bank of Montreal

Can any of the company-specific risk be diversified away by investing in both MicroSectors Solactive and Bank of Montreal 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 MicroSectors Solactive and Bank of Montreal into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between MicroSectors Solactive FANG and Bank of Montreal, you can compare the effects of market volatilities on MicroSectors Solactive and Bank of Montreal 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 MicroSectors Solactive with a short position of Bank of Montreal. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors Solactive and Bank of Montreal.

Diversification Opportunities for MicroSectors Solactive and Bank of Montreal

0.18

Correlation Coefficient

MicroSectors Solactive  Bank of Montreal

Average diversification

The 3 months correlation between MicroSectors and Bank is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors Solactive FANG and Bank of Montreal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Montreal and MicroSectors Solactive 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 MicroSectors Solactive FANG are associated (or correlated) with Bank of Montreal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Montreal has no effect on the direction of MicroSectors Solactive i.e., MicroSectors Solactive and Bank of Montreal go up and down completely randomly.

Pair Corralation between MicroSectors Solactive and Bank of Montreal

Given the investment horizon of 90 days MicroSectors Solactive is expected to generate 2.42 times less return on investment than Bank of Montreal. In addition to that, MicroSectors Solactive is 1.08 times more volatile than Bank of Montreal. It trades about 0.08 of its total potential returns per unit of risk. Bank of Montreal is currently generating about 0.22 per unit of volatility. If you would invest  2,679  in Bank of Montreal on December 30, 2024 and sell it today you would earn a total of  936.00  from holding Bank of Montreal or generate 34.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	45.16%
Values	Daily Returns

MicroSectors Solactive FANG  vs.  Bank of Montreal

MicroSectors Solactive

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors Solactive FANG are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, MicroSectors Solactive showed solid returns over the last few months and may actually be approaching a breakup point.

Bank of Montreal

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak forward-looking signals, Bank of Montreal exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MicroSectors Solactive and Bank of Montreal

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

The idea behind MicroSectors Solactive FANG and Bank of Montreal 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.