Correlation Between IShares MSCI and BMO Europe

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

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

Diversification Opportunities for IShares MSCI and BMO Europe

0.88

Correlation Coefficient

IShares MSCI  BMO Europe

Very poor diversification

The 3 months correlation between IShares and BMO is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI Europe 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 IShares MSCI 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 MSCI Europe 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 IShares MSCI i.e., IShares MSCI and BMO Europe go up and down completely randomly.

Pair Corralation between IShares MSCI and BMO Europe

Assuming the 90 days trading horizon iShares MSCI Europe is expected to generate 0.88 times more return on investment than BMO Europe. However, iShares MSCI Europe is 1.14 times less risky than BMO Europe. It trades about -0.04 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  3,286  in iShares MSCI Europe on September 2, 2024 and sell it today you would lose (61.00) from holding iShares MSCI Europe or give up 1.86% of portfolio value over 90 days.

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

iShares MSCI Europe  vs.  BMO Europe High

iShares MSCI Europe

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares MSCI Europe has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical indicators, IShares MSCI 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 IShares MSCI and BMO Europe

The main advantage of trading using opposite IShares MSCI and BMO Europe positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares MSCI 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 iShares MSCI Europe 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.

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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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.