Correlation Between IShares IG and BMO Short

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

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

Diversification Opportunities for IShares IG and BMO Short

0.61

Correlation Coefficient

IShares IG  BMO Short

Poor diversification

The 3 months correlation between IShares and BMO is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding iShares IG Corporate and BMO Short Term IG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Short Term and IShares IG 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 IG Corporate are associated (or correlated) with BMO Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Short Term has no effect on the direction of IShares IG i.e., IShares IG and BMO Short go up and down completely randomly.

Pair Corralation between IShares IG and BMO Short

Assuming the 90 days trading horizon iShares IG Corporate is expected to generate 1.95 times more return on investment than BMO Short. However, IShares IG is 1.95 times more volatile than BMO Short Term IG. It trades about 0.14 of its potential returns per unit of risk. BMO Short Term IG is currently generating about 0.1 per unit of risk. If you would invest  1,942  in iShares IG Corporate on December 2, 2024 and sell it today you would earn a total of  53.00  from holding iShares IG Corporate or generate 2.73% return on investment over 90 days.

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

iShares IG Corporate  vs.  BMO Short Term IG

iShares IG Corporate

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares IG Corporate has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, IShares IG is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO Short Term

Risk-Adjusted Performance

Insignificant

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

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

The idea behind iShares IG Corporate and BMO Short Term IG 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.