Correlation Between Steel Dynamics and BMO Global

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

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

Diversification Opportunities for Steel Dynamics and BMO Global

0.72

Correlation Coefficient

Steel Dynamics  BMO Global

Poor diversification

The 3 months correlation between Steel and BMO is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and BMO Global Strategic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Global Strategic and Steel Dynamics 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 Steel Dynamics are associated (or correlated) with BMO Global. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Global Strategic has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and BMO Global go up and down completely randomly.

Pair Corralation between Steel Dynamics and BMO Global

Given the investment horizon of 90 days Steel Dynamics is expected to generate 6.99 times more return on investment than BMO Global. However, Steel Dynamics is 6.99 times more volatile than BMO Global Strategic. It trades about 0.11 of its potential returns per unit of risk. BMO Global Strategic is currently generating about 0.02 per unit of risk. If you would invest  11,334  in Steel Dynamics on December 28, 2024 and sell it today you would earn a total of  1,500  from holding Steel Dynamics or generate 13.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.77%
Values	Daily Returns

Steel Dynamics  vs.  BMO Global Strategic

Steel Dynamics

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Steel Dynamics exhibited solid returns over the last few months and may actually be approaching a breakup point.

BMO Global Strategic

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Global Strategic are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Global is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Steel Dynamics and BMO Global

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

The idea behind Steel Dynamics and BMO Global Strategic 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.