Correlation Between BMO MSCI and BMO SP

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

By analyzing existing cross correlation between BMO MSCI EAFE and BMO SP 500, you can compare the effects of market volatilities on BMO MSCI and BMO SP 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 MSCI with a short position of BMO SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO MSCI and BMO SP.

Diversification Opportunities for BMO MSCI and BMO SP

0.31

Correlation Coefficient

BMO MSCI  BMO SP

Weak diversification

The 3 months correlation between BMO and BMO is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI EAFE and BMO SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SP 500 and BMO MSCI 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 MSCI EAFE are associated (or correlated) with BMO SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SP 500 has no effect on the direction of BMO MSCI i.e., BMO MSCI and BMO SP go up and down completely randomly.

Pair Corralation between BMO MSCI and BMO SP

Assuming the 90 days trading horizon BMO MSCI is expected to generate 5.29 times less return on investment than BMO SP. But when comparing it to its historical volatility, BMO MSCI EAFE is 1.28 times less risky than BMO SP. It trades about 0.09 of its potential returns per unit of risk. BMO SP 500 is currently generating about 0.36 of returns per unit of risk over similar time horizon. If you would invest  7,882  in BMO SP 500 on September 1, 2024 and sell it today you would earn a total of  465.00  from holding BMO SP 500 or generate 5.9% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.65%
Values	Daily Returns

BMO MSCI EAFE  vs.  BMO SP 500

BMO MSCI EAFE

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO MSCI EAFE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, BMO MSCI is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO SP 500

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, BMO SP may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with BMO MSCI and BMO SP

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

The idea behind BMO MSCI EAFE and BMO SP 500 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.