Correlation Between BMO MSCI and BMO Aggregate

Can any of the company-specific risk be diversified away by investing in both BMO MSCI and BMO Aggregate 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 BMO Aggregate 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 BMO Aggregate Bond, you can compare the effects of market volatilities on BMO MSCI and BMO Aggregate 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 BMO Aggregate. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO MSCI and BMO Aggregate.

Diversification Opportunities for BMO MSCI and BMO Aggregate

0.21

Correlation Coefficient

BMO MSCI  BMO Aggregate

Modest diversification

The 3 months correlation between BMO and BMO is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI USA and BMO Aggregate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Aggregate Bond 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 BMO Aggregate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Aggregate Bond has no effect on the direction of BMO MSCI i.e., BMO MSCI and BMO Aggregate go up and down completely randomly.

Pair Corralation between BMO MSCI and BMO Aggregate

Assuming the 90 days trading horizon BMO MSCI USA is expected to generate 2.05 times more return on investment than BMO Aggregate. However, BMO MSCI is 2.05 times more volatile than BMO Aggregate Bond. It trades about 0.24 of its potential returns per unit of risk. BMO Aggregate Bond is currently generating about -0.01 per unit of risk. If you would invest  5,426  in BMO MSCI USA on September 16, 2024 and sell it today you would earn a total of  666.00  from holding BMO MSCI USA or generate 12.27% return on investment over 90 days.

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

BMO MSCI USA  vs.  BMO Aggregate Bond

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.

BMO Aggregate Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO Aggregate Bond has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, BMO Aggregate is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BMO MSCI and BMO Aggregate

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

The idea behind BMO MSCI USA and BMO Aggregate Bond 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..