Correlation Between Brompton European and BMO SPTSX

Can any of the company-specific risk be diversified away by investing in both Brompton European and BMO SPTSX 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 Brompton European and BMO SPTSX into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Brompton European Dividend and BMO SPTSX Equal, you can compare the effects of market volatilities on Brompton European and BMO SPTSX 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 Brompton European with a short position of BMO SPTSX. Check out your portfolio center. Please also check ongoing floating volatility patterns of Brompton European and BMO SPTSX.

Diversification Opportunities for Brompton European and BMO SPTSX

0.29

Correlation Coefficient

Brompton European  BMO SPTSX

Modest diversification

The 3 months correlation between Brompton and BMO is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Brompton European Dividend and BMO SPTSX Equal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SPTSX Equal and Brompton European 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 Brompton European Dividend are associated (or correlated) with BMO SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SPTSX Equal has no effect on the direction of Brompton European i.e., Brompton European and BMO SPTSX go up and down completely randomly.

Pair Corralation between Brompton European and BMO SPTSX

Assuming the 90 days trading horizon Brompton European is expected to generate 8.19 times less return on investment than BMO SPTSX. But when comparing it to its historical volatility, Brompton European Dividend is 1.3 times less risky than BMO SPTSX. It trades about 0.03 of its potential returns per unit of risk. BMO SPTSX Equal is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  6,173  in BMO SPTSX Equal on September 3, 2024 and sell it today you would earn a total of  1,104  from holding BMO SPTSX Equal or generate 17.88% return on investment over 90 days.

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

Brompton European Dividend  vs.  BMO SPTSX Equal

Brompton European

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Brompton European Dividend are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Brompton European is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO SPTSX Equal

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SPTSX Equal are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SPTSX displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Brompton European and BMO SPTSX

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

The idea behind Brompton European Dividend and BMO SPTSX Equal 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.