Correlation Between BMO BBB and BMO High

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

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

Diversification Opportunities for BMO BBB and BMO High

0.95

Correlation Coefficient

BMO BBB  BMO High

Almost no diversification

The 3 months correlation between BMO and BMO is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding BMO BBB Corporate and BMO High Quality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO High Quality and BMO BBB 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 BMO BBB Corporate are associated (or correlated) with BMO High. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO High Quality has no effect on the direction of BMO BBB i.e., BMO BBB and BMO High go up and down completely randomly.

Pair Corralation between BMO BBB and BMO High

Assuming the 90 days trading horizon BMO BBB Corporate is expected to under-perform the BMO High. In addition to that, BMO BBB is 2.26 times more volatile than BMO High Quality. It trades about -0.01 of its total potential returns per unit of risk. BMO High Quality is currently generating about -0.01 per unit of volatility. If you would invest  2,900  in BMO High Quality on October 9, 2024 and sell it today you would lose (1.00) from holding BMO High Quality or give up 0.03% of portfolio value over 90 days.

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

BMO BBB Corporate  vs.  BMO High Quality

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.

BMO High Quality

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO High Quality are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO High is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BMO BBB and BMO High

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

The idea behind BMO BBB Corporate and BMO High Quality 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.