Correlation Between First Trust and BMO Covered

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

By analyzing existing cross correlation between First Trust AlphaDEX and BMO Covered Call, you can compare the effects of market volatilities on First Trust and BMO Covered 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 Covered. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and BMO Covered.

Diversification Opportunities for First Trust and BMO Covered

-0.37

Correlation Coefficient

First Trust  BMO Covered

Very good diversification

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

Pair Corralation between First Trust and BMO Covered

Assuming the 90 days trading horizon First Trust AlphaDEX is expected to generate 2.24 times more return on investment than BMO Covered. However, First Trust is 2.24 times more volatile than BMO Covered Call. It trades about 0.23 of its potential returns per unit of risk. BMO Covered Call is currently generating about -0.14 per unit of risk. If you would invest  9,235  in First Trust AlphaDEX on October 1, 2024 and sell it today you would earn a total of  1,127  from holding First Trust AlphaDEX or generate 12.2% return on investment over 90 days.

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

First Trust AlphaDEX  vs.  BMO Covered Call

First Trust AlphaDEX

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust AlphaDEX are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

BMO Covered Call

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with First Trust and BMO Covered

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

The idea behind First Trust AlphaDEX and BMO Covered Call 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.