Correlation Between Vanguard FTSE and BMO Europe

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

By analyzing existing cross correlation between Vanguard FTSE Developed and BMO Europe High, you can compare the effects of market volatilities on Vanguard FTSE and BMO Europe 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 Vanguard FTSE with a short position of BMO Europe. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard FTSE and BMO Europe.

Diversification Opportunities for Vanguard FTSE and BMO Europe

0.95

Correlation Coefficient

Vanguard FTSE  BMO Europe

Almost no diversification

The 3 months correlation between Vanguard and BMO is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard FTSE Developed and BMO Europe High in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Europe High and Vanguard FTSE 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 Vanguard FTSE Developed are associated (or correlated) with BMO Europe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Europe High has no effect on the direction of Vanguard FTSE i.e., Vanguard FTSE and BMO Europe go up and down completely randomly.

Pair Corralation between Vanguard FTSE and BMO Europe

Assuming the 90 days horizon Vanguard FTSE Developed is expected to generate 0.97 times more return on investment than BMO Europe. However, Vanguard FTSE Developed is 1.03 times less risky than BMO Europe. It trades about -0.03 of its potential returns per unit of risk. BMO Europe High is currently generating about -0.04 per unit of risk. If you would invest  3,635  in Vanguard FTSE Developed on August 31, 2024 and sell it today you would lose (60.00) from holding Vanguard FTSE Developed or give up 1.65% of portfolio value over 90 days.

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

Vanguard FTSE Developed  vs.  BMO Europe High

Vanguard FTSE Developed

Risk-Adjusted Performance

0 of 100

Very Weak

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

BMO Europe High

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Vanguard FTSE and BMO Europe

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

The idea behind Vanguard FTSE Developed and BMO Europe High 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 Anywhere module to track or share privately all of your investments from the convenience of any device.