Correlation Between BMO SPTSX and First Trust

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

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

Diversification Opportunities for BMO SPTSX and First Trust

0.95

Correlation Coefficient

BMO SPTSX  First Trust

Almost no diversification

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

Pair Corralation between BMO SPTSX and First Trust

Assuming the 90 days trading horizon BMO SPTSX Capped is expected to under-perform the First Trust. In addition to that, BMO SPTSX is 1.3 times more volatile than First Trust Cboe. It trades about -0.21 of its total potential returns per unit of risk. First Trust Cboe is currently generating about -0.11 per unit of volatility. If you would invest  4,362  in First Trust Cboe on September 22, 2024 and sell it today you would lose (50.00) from holding First Trust Cboe or give up 1.15% of portfolio value over 90 days.

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

BMO SPTSX Capped  vs.  First Trust Cboe

BMO SPTSX Capped

Risk-Adjusted Performance

8 of 100

Modest

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

First Trust Cboe

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Cboe are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, First Trust is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with BMO SPTSX and First Trust

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

The idea behind BMO SPTSX Capped and First Trust Cboe 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.

Check out your portfolio center.

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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.