Correlation Between IShares Core and BMO Government

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

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

Diversification Opportunities for IShares Core and BMO Government

0.93

Correlation Coefficient

IShares Core  BMO Government

Almost no diversification

The 3 months correlation between IShares and BMO is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding iShares Core Canadian and BMO Government Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Government Bond and IShares Core 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 iShares Core Canadian are associated (or correlated) with BMO Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Government Bond has no effect on the direction of IShares Core i.e., IShares Core and BMO Government go up and down completely randomly.

Pair Corralation between IShares Core and BMO Government

Assuming the 90 days trading horizon iShares Core Canadian is expected to generate 0.73 times more return on investment than BMO Government. However, iShares Core Canadian is 1.36 times less risky than BMO Government. It trades about -0.18 of its potential returns per unit of risk. BMO Government Bond is currently generating about -0.21 per unit of risk. If you would invest  2,033  in iShares Core Canadian on October 8, 2024 and sell it today you would lose (15.00) from holding iShares Core Canadian or give up 0.74% of portfolio value over 90 days.

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

iShares Core Canadian  vs.  BMO Government Bond

iShares Core Canadian

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Core Canadian are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, IShares Core is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

BMO Government Bond

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Government Bond are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Government is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with IShares Core and BMO Government

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

The idea behind iShares Core Canadian and BMO Government 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.