Correlation Between IShares Core and BMO Aggregate

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

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

Diversification Opportunities for IShares Core and BMO Aggregate

0.75

Correlation Coefficient

IShares Core  BMO Aggregate

Poor diversification

The 3 months correlation between IShares and BMO is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding iShares Core MSCI and BMO Aggregate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Aggregate 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 MSCI are associated (or correlated) with BMO Aggregate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Aggregate Bond has no effect on the direction of IShares Core i.e., IShares Core and BMO Aggregate go up and down completely randomly.

Pair Corralation between IShares Core and BMO Aggregate

Assuming the 90 days trading horizon iShares Core MSCI is expected to generate 1.6 times more return on investment than BMO Aggregate. However, IShares Core is 1.6 times more volatile than BMO Aggregate Bond. It trades about 0.2 of its potential returns per unit of risk. BMO Aggregate Bond is currently generating about 0.05 per unit of risk. If you would invest  3,801  in iShares Core MSCI on November 29, 2024 and sell it today you would earn a total of  284.00  from holding iShares Core MSCI or generate 7.47% return on investment over 90 days.

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

iShares Core MSCI  vs.  BMO Aggregate Bond

iShares Core MSCI

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Core MSCI are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, IShares Core may actually be approaching a critical reversion point that can send shares even higher in March 2025.

BMO Aggregate Bond

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Aggregate Bond are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, BMO Aggregate 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 Aggregate

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

The idea behind iShares Core MSCI and BMO Aggregate 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.

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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.