Correlation Between IShares MSCI and BMO Discount

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

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

Diversification Opportunities for IShares MSCI and BMO Discount

0.78

Correlation Coefficient

IShares MSCI  BMO Discount

Poor diversification

The 3 months correlation between IShares and BMO is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI EAFE and BMO Discount Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Discount Bond 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 EAFE are associated (or correlated) with BMO Discount. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Discount Bond has no effect on the direction of IShares MSCI i.e., IShares MSCI and BMO Discount go up and down completely randomly.

Pair Corralation between IShares MSCI and BMO Discount

Assuming the 90 days trading horizon iShares MSCI EAFE is expected to generate 1.89 times more return on investment than BMO Discount. However, IShares MSCI is 1.89 times more volatile than BMO Discount Bond. It trades about 0.16 of its potential returns per unit of risk. BMO Discount Bond is currently generating about 0.09 per unit of risk. If you would invest  3,573  in iShares MSCI EAFE on December 22, 2024 and sell it today you would earn a total of  249.00  from holding iShares MSCI EAFE or generate 6.97% return on investment over 90 days.

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

iShares MSCI EAFE  vs.  BMO Discount Bond

iShares MSCI EAFE

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI EAFE are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, IShares MSCI may actually be approaching a critical reversion point that can send shares even higher in April 2025.

BMO Discount Bond

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Discount Bond are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Discount 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 Discount

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

The idea behind iShares MSCI EAFE and BMO Discount 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.