Correlation Between Bank of Montreal and Diageo Plc

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

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

Diversification Opportunities for Bank of Montreal and Diageo Plc

-0.37

Correlation Coefficient

Bank of Montreal  Diageo Plc

Very good diversification

The 3 months correlation between Bank and Diageo is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Bank of Montreal and Diageo plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diageo plc and Bank of Montreal 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 Bank of Montreal are associated (or correlated) with Diageo Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diageo plc has no effect on the direction of Bank of Montreal i.e., Bank of Montreal and Diageo Plc go up and down completely randomly.

Pair Corralation between Bank of Montreal and Diageo Plc

Assuming the 90 days horizon Bank of Montreal is expected to generate 1.95 times less return on investment than Diageo Plc. In addition to that, Bank of Montreal is 1.06 times more volatile than Diageo plc. It trades about 0.11 of its total potential returns per unit of risk. Diageo plc is currently generating about 0.22 per unit of volatility. If you would invest  2,821  in Diageo plc on September 22, 2024 and sell it today you would earn a total of  204.00  from holding Diageo plc or generate 7.23% return on investment over 90 days.

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

Bank of Montreal  vs.  Diageo plc

Bank of Montreal

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Bank of Montreal reported solid returns over the last few months and may actually be approaching a breakup point.

Diageo plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward indicators, Diageo Plc is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Bank of Montreal and Diageo Plc

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

The idea behind Bank of Montreal and Diageo plc 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.