Correlation Between BMO Short and BMO Ultra

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

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

Diversification Opportunities for BMO Short and BMO Ultra

0.72

Correlation Coefficient

BMO Short  BMO Ultra

Poor diversification

The 3 months correlation between BMO and BMO is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding BMO Short Corporate and BMO Ultra Short Term in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Ultra Short and BMO Short 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 Short Corporate are associated (or correlated) with BMO Ultra. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Ultra Short has no effect on the direction of BMO Short i.e., BMO Short and BMO Ultra go up and down completely randomly.

Pair Corralation between BMO Short and BMO Ultra

Assuming the 90 days trading horizon BMO Short Corporate is expected to generate 4.99 times more return on investment than BMO Ultra. However, BMO Short is 4.99 times more volatile than BMO Ultra Short Term. It trades about 0.16 of its potential returns per unit of risk. BMO Ultra Short Term is currently generating about 0.61 per unit of risk. If you would invest  1,362  in BMO Short Corporate on August 31, 2024 and sell it today you would earn a total of  20.00  from holding BMO Short Corporate or generate 1.47% return on investment over 90 days.

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

BMO Short Corporate  vs.  BMO Ultra Short Term

BMO Short Corporate

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Short Corporate are ranked lower than 12 (%) 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.

BMO Ultra Short

Risk-Adjusted Performance

48 of 100

Excellent

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Ultra Short Term are ranked lower than 48 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Ultra 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 Short and BMO Ultra

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

The idea behind BMO Short Corporate and BMO Ultra Short Term 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.