Correlation Between First Trust and BMO Aggregate

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

By analyzing existing cross correlation between First Trust Nasdaq and BMO Aggregate Bond, you can compare the effects of market volatilities on First Trust 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 First Trust with a short position of BMO Aggregate. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and BMO Aggregate.

Diversification Opportunities for First Trust and BMO Aggregate

0.08

Correlation Coefficient

First Trust  BMO Aggregate

Significant diversification

The 3 months correlation between First and BMO is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Nasdaq 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 First Trust 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 First Trust Nasdaq 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 First Trust i.e., First Trust and BMO Aggregate go up and down completely randomly.

Pair Corralation between First Trust and BMO Aggregate

Assuming the 90 days trading horizon First Trust Nasdaq is expected to generate 4.13 times more return on investment than BMO Aggregate. However, First Trust is 4.13 times more volatile than BMO Aggregate Bond. It trades about 0.1 of its potential returns per unit of risk. BMO Aggregate Bond is currently generating about -0.18 per unit of risk. If you would invest  1,543  in First Trust Nasdaq on September 17, 2024 and sell it today you would earn a total of  114.00  from holding First Trust Nasdaq or generate 7.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

First Trust Nasdaq  vs.  BMO Aggregate Bond

First Trust Nasdaq

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Nasdaq are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, First Trust 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. Despite somewhat strong basic indicators, BMO Aggregate is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with First Trust and BMO Aggregate

The main advantage of trading using opposite First Trust and BMO Aggregate positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust 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 First Trust Nasdaq 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.

Check out your portfolio center.

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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.