Correlation Between IShares Canadian and BMO Short

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

Diversification Opportunities for IShares Canadian and BMO Short

0.82

Correlation Coefficient

IShares Canadian  BMO Short

Very poor diversification

The 3 months correlation between IShares and BMO is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding iShares Canadian Real and BMO Short Corporate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Short Corporate and IShares Canadian 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 Canadian Real 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 Corporate has no effect on the direction of IShares Canadian i.e., IShares Canadian and BMO Short go up and down completely randomly.

Pair Corralation between IShares Canadian and BMO Short

Assuming the 90 days trading horizon IShares Canadian is expected to generate 16.64 times less return on investment than BMO Short. In addition to that, IShares Canadian is 3.94 times more volatile than BMO Short Corporate. It trades about 0.0 of its total potential returns per unit of risk. BMO Short Corporate is currently generating about 0.11 per unit of volatility. If you would invest  1,245  in BMO Short Corporate on September 16, 2024 and sell it today you would earn a total of  145.00  from holding BMO Short Corporate or generate 11.65% return on investment over 90 days.

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

iShares Canadian Real  vs.  BMO Short Corporate

iShares Canadian Real

Risk-Adjusted Performance

0 of 100

Very Weak

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

BMO Short Corporate

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Short Corporate are ranked lower than 7 (%) 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 Canadian and BMO Short

The main advantage of trading using opposite IShares Canadian and BMO Short positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Canadian 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 Canadian Real and BMO Short 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.