Correlation Between IShares Floating and BMO Aggregate

Can any of the company-specific risk be diversified away by investing in both IShares Floating 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 Floating 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 Floating Rate and BMO Aggregate Bond, you can compare the effects of market volatilities on IShares Floating 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 Floating with a short position of BMO Aggregate. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Floating and BMO Aggregate.

Diversification Opportunities for IShares Floating and BMO Aggregate

0.87

Correlation Coefficient

IShares Floating  BMO Aggregate

Very poor diversification

The 3 months correlation between IShares and BMO is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding iShares Floating Rate 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 Floating 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 Floating Rate 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 Floating i.e., IShares Floating and BMO Aggregate go up and down completely randomly.

Pair Corralation between IShares Floating and BMO Aggregate

Assuming the 90 days trading horizon IShares Floating is expected to generate 1.9 times less return on investment than BMO Aggregate. But when comparing it to its historical volatility, iShares Floating Rate is 6.51 times less risky than BMO Aggregate. It trades about 0.26 of its potential returns per unit of risk. BMO Aggregate Bond is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,979  in BMO Aggregate Bond on December 30, 2024 and sell it today you would earn a total of  47.00  from holding BMO Aggregate Bond or generate 1.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

iShares Floating Rate  vs.  BMO Aggregate Bond

iShares Floating Rate

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Floating Rate are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares Floating is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO Aggregate Bond

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Aggregate Bond are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, BMO Aggregate is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IShares Floating and BMO Aggregate

The main advantage of trading using opposite IShares Floating and BMO Aggregate positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Floating 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 Floating Rate 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.