Correlation Between IShares SPTSX and BMO BBB

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

By analyzing existing cross correlation between iShares SPTSX 60 and BMO BBB Corporate, you can compare the effects of market volatilities on IShares SPTSX and BMO BBB 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 SPTSX with a short position of BMO BBB. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares SPTSX and BMO BBB.

Diversification Opportunities for IShares SPTSX and BMO BBB

0.5

Correlation Coefficient

IShares SPTSX  BMO BBB

Very weak diversification

The 3 months correlation between IShares and BMO is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding iShares SPTSX 60 and BMO BBB Corporate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO BBB Corporate and IShares SPTSX 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 SPTSX 60 are associated (or correlated) with BMO BBB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO BBB Corporate has no effect on the direction of IShares SPTSX i.e., IShares SPTSX and BMO BBB go up and down completely randomly.

Pair Corralation between IShares SPTSX and BMO BBB

Assuming the 90 days trading horizon iShares SPTSX 60 is expected to under-perform the BMO BBB. In addition to that, IShares SPTSX is 2.35 times more volatile than BMO BBB Corporate. It trades about -0.16 of its total potential returns per unit of risk. BMO BBB Corporate is currently generating about -0.01 per unit of volatility. If you would invest  2,872  in BMO BBB Corporate on October 9, 2024 and sell it today you would lose (2.00) from holding BMO BBB Corporate or give up 0.07% of portfolio value over 90 days.

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

iShares SPTSX 60  vs.  BMO BBB Corporate

iShares SPTSX 60

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SPTSX 60 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares SPTSX is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO BBB Corporate

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BMO BBB Corporate are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO BBB 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 SPTSX and BMO BBB

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

The idea behind iShares SPTSX 60 and BMO BBB Corporate 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.