Correlation Between BMO Discount and BMO Canadian

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

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

Diversification Opportunities for BMO Discount and BMO Canadian

0.63

Correlation Coefficient

BMO Discount  BMO Canadian

Poor diversification

The 3 months correlation between BMO and BMO is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding BMO Discount Bond and BMO Canadian Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Canadian Bank and BMO Discount 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 Discount Bond are associated (or correlated) with BMO Canadian. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Canadian Bank has no effect on the direction of BMO Discount i.e., BMO Discount and BMO Canadian go up and down completely randomly.

Pair Corralation between BMO Discount and BMO Canadian

Assuming the 90 days trading horizon BMO Discount is expected to generate 1.49 times less return on investment than BMO Canadian. In addition to that, BMO Discount is 3.67 times more volatile than BMO Canadian Bank. It trades about 0.08 of its total potential returns per unit of risk. BMO Canadian Bank is currently generating about 0.43 per unit of volatility. If you would invest  2,953  in BMO Canadian Bank on October 5, 2024 and sell it today you would earn a total of  79.00  from holding BMO Canadian Bank or generate 2.68% return on investment over 90 days.

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

BMO Discount Bond  vs.  BMO Canadian Bank

BMO Discount Bond

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Discount Bond are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Discount is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO Canadian Bank

Risk-Adjusted Performance

33 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Canadian Bank are ranked lower than 33 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy forward indicators, BMO Canadian 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 Discount and BMO Canadian

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

The idea behind BMO Discount Bond and BMO Canadian Bank 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .