Correlation Between BMO MSCI and IShares Core

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

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

Diversification Opportunities for BMO MSCI and IShares Core

0.96

Correlation Coefficient

BMO MSCI  IShares Core

Almost no diversification

The 3 months correlation between BMO and IShares is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI USA and iShares Core SPTSX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Core SPTSX and BMO MSCI 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 BMO MSCI USA are associated (or correlated) with IShares Core. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Core SPTSX has no effect on the direction of BMO MSCI i.e., BMO MSCI and IShares Core go up and down completely randomly.

Pair Corralation between BMO MSCI and IShares Core

Assuming the 90 days trading horizon BMO MSCI USA is expected to generate 1.22 times more return on investment than IShares Core. However, BMO MSCI is 1.22 times more volatile than iShares Core SPTSX. It trades about 0.29 of its potential returns per unit of risk. iShares Core SPTSX is currently generating about 0.18 per unit of risk. If you would invest  5,879  in BMO MSCI USA on September 16, 2024 and sell it today you would earn a total of  213.00  from holding BMO MSCI USA or generate 3.62% return on investment over 90 days.

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

BMO MSCI USA  vs.  iShares Core SPTSX

BMO MSCI USA

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI USA are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO MSCI may actually be approaching a critical reversion point that can send shares even higher in January 2025.

iShares Core SPTSX

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Core SPTSX are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating fundamental indicators, IShares Core may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO MSCI and IShares Core

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

The idea behind BMO MSCI USA and iShares Core SPTSX 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.