Correlation Between Royal Bank and Bank of Montreal

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

By analyzing existing cross correlation between Royal Bank of and Bank of Montreal, you can compare the effects of market volatilities on Royal Bank and Bank of Montreal 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 Royal Bank with a short position of Bank of Montreal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royal Bank and Bank of Montreal.

Diversification Opportunities for Royal Bank and Bank of Montreal

-0.12

Correlation Coefficient

Royal Bank  Bank of Montreal

Good diversification

The 3 months correlation between Royal and Bank is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Royal Bank of and Bank of Montreal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Montreal and Royal Bank 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 Royal Bank of are associated (or correlated) with Bank of Montreal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Montreal has no effect on the direction of Royal Bank i.e., Royal Bank and Bank of Montreal go up and down completely randomly.

Pair Corralation between Royal Bank and Bank of Montreal

Allowing for the 90-day total investment horizon Royal Bank of is expected to under-perform the Bank of Montreal. But the stock apears to be less risky and, when comparing its historical volatility, Royal Bank of is 1.33 times less risky than Bank of Montreal. The stock trades about -0.07 of its potential returns per unit of risk. The Bank of Montreal is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  9,419  in Bank of Montreal on November 28, 2024 and sell it today you would earn a total of  995.00  from holding Bank of Montreal or generate 10.56% return on investment over 90 days.

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

Royal Bank of  vs.  Bank of Montreal

Royal Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royal Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Royal Bank is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Bank of Montreal

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, Bank of Montreal may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Royal Bank and Bank of Montreal

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

The idea behind Royal Bank of and Bank of Montreal 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.