Correlation Between IShares NASDAQ and BMO SP

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

By analyzing existing cross correlation between iShares NASDAQ 100 and BMO SP 500, you can compare the effects of market volatilities on IShares NASDAQ and BMO SP 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 NASDAQ with a short position of BMO SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares NASDAQ and BMO SP.

Diversification Opportunities for IShares NASDAQ and BMO SP

0.85

Correlation Coefficient

IShares NASDAQ  BMO SP

Very poor diversification

The 3 months correlation between IShares and BMO is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding iShares NASDAQ 100 and BMO SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SP 500 and IShares NASDAQ 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 NASDAQ 100 are associated (or correlated) with BMO SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SP 500 has no effect on the direction of IShares NASDAQ i.e., IShares NASDAQ and BMO SP go up and down completely randomly.

Pair Corralation between IShares NASDAQ and BMO SP

Assuming the 90 days trading horizon iShares NASDAQ 100 is expected to generate 1.38 times more return on investment than BMO SP. However, IShares NASDAQ is 1.38 times more volatile than BMO SP 500. It trades about 0.07 of its potential returns per unit of risk. BMO SP 500 is currently generating about 0.05 per unit of risk. If you would invest  5,037  in iShares NASDAQ 100 on October 4, 2024 and sell it today you would earn a total of  227.00  from holding iShares NASDAQ 100 or generate 4.51% return on investment over 90 days.

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

iShares NASDAQ 100  vs.  BMO SP 500

iShares NASDAQ 100

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares NASDAQ 100 are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares NASDAQ is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO SP 500

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, BMO SP 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 NASDAQ and BMO SP

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

The idea behind iShares NASDAQ 100 and BMO SP 500 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.