Correlation Between BMO MSCI and Invesco SP

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

Diversification Opportunities for BMO MSCI and Invesco SP

0.65

Correlation Coefficient

BMO MSCI  Invesco SP

Poor diversification

The 3 months correlation between BMO and Invesco is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI EAFE and Invesco SP International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco SP International 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 Invesco SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco SP International has no effect on the direction of BMO MSCI i.e., BMO MSCI and Invesco SP go up and down completely randomly.

Pair Corralation between BMO MSCI and Invesco SP

Assuming the 90 days trading horizon BMO MSCI EAFE is expected to generate 0.88 times more return on investment than Invesco SP. However, BMO MSCI EAFE is 1.14 times less risky than Invesco SP. It trades about 0.29 of its potential returns per unit of risk. Invesco SP International is currently generating about 0.18 per unit of risk. If you would invest  2,286  in BMO MSCI EAFE on September 15, 2024 and sell it today you would earn a total of  77.00  from holding BMO MSCI EAFE or generate 3.37% return on investment over 90 days.

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

BMO MSCI EAFE  vs.  Invesco SP International

BMO MSCI EAFE

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI EAFE are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO MSCI is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Invesco SP International

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco SP International are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Invesco SP is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BMO MSCI and Invesco SP

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

The idea behind BMO MSCI EAFE and Invesco SP International 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.