Correlation Between IShares China and BMO NASDAQ

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

By analyzing existing cross correlation between iShares China and BMO NASDAQ 100, you can compare the effects of market volatilities on IShares China and BMO NASDAQ 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 China with a short position of BMO NASDAQ. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares China and BMO NASDAQ.

Diversification Opportunities for IShares China and BMO NASDAQ

0.63

Correlation Coefficient

IShares China  BMO NASDAQ

Poor diversification

The 3 months correlation between IShares and BMO is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding iShares China and BMO NASDAQ 100 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO NASDAQ 100 and IShares China 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 China are associated (or correlated) with BMO NASDAQ. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO NASDAQ 100 has no effect on the direction of IShares China i.e., IShares China and BMO NASDAQ go up and down completely randomly.

Pair Corralation between IShares China and BMO NASDAQ

Assuming the 90 days trading horizon iShares China is expected to generate 1.8 times more return on investment than BMO NASDAQ. However, IShares China is 1.8 times more volatile than BMO NASDAQ 100. It trades about 0.07 of its potential returns per unit of risk. BMO NASDAQ 100 is currently generating about 0.1 per unit of risk. If you would invest  1,500  in iShares China on September 4, 2024 and sell it today you would earn a total of  529.00  from holding iShares China or generate 35.27% return on investment over 90 days.

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

iShares China  vs.  BMO NASDAQ 100

iShares China

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares China are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical indicators, IShares China displayed solid returns over the last few months and may actually be approaching a breakup point.

BMO NASDAQ 100

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO NASDAQ 100 are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO NASDAQ may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares China and BMO NASDAQ

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

The idea behind iShares China and BMO NASDAQ 100 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.