Correlation Between BMO Discount and BMO Real

Can any of the company-specific risk be diversified away by investing in both BMO Discount and BMO Real 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 Real 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 Real Return, you can compare the effects of market volatilities on BMO Discount and BMO Real 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 Real. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Discount and BMO Real.

Diversification Opportunities for BMO Discount and BMO Real

0.97

Correlation Coefficient

BMO Discount  BMO Real

Almost no diversification

The 3 months correlation between BMO and BMO is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding BMO Discount Bond and BMO Real Return in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Real Return 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 Real. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Real Return has no effect on the direction of BMO Discount i.e., BMO Discount and BMO Real go up and down completely randomly.

Pair Corralation between BMO Discount and BMO Real

Assuming the 90 days trading horizon BMO Discount is expected to generate 1.43 times less return on investment than BMO Real. But when comparing it to its historical volatility, BMO Discount Bond is 1.78 times less risky than BMO Real. It trades about 0.07 of its potential returns per unit of risk. BMO Real Return is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,425  in BMO Real Return on December 27, 2024 and sell it today you would earn a total of  33.00  from holding BMO Real Return or generate 2.32% return on investment over 90 days.

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

BMO Discount Bond  vs.  BMO Real Return

BMO Discount Bond

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Discount Bond are ranked lower than 5 (%) 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 Real Return

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Real Return are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Real 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 Real

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

The idea behind BMO Discount Bond and BMO Real Return 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.