Correlation Between BMO Low and IShares ESG

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

By analyzing existing cross correlation between BMO Low Volatility and iShares ESG Advanced, you can compare the effects of market volatilities on BMO Low and IShares ESG 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 Low with a short position of IShares ESG. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Low and IShares ESG.

Diversification Opportunities for BMO Low and IShares ESG

0.95

Correlation Coefficient

BMO Low  IShares ESG

Almost no diversification

The 3 months correlation between BMO and IShares is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding BMO Low Volatility and iShares ESG Advanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares ESG Advanced and BMO Low 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 Low Volatility are associated (or correlated) with IShares ESG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares ESG Advanced has no effect on the direction of BMO Low i.e., BMO Low and IShares ESG go up and down completely randomly.

Pair Corralation between BMO Low and IShares ESG

Assuming the 90 days trading horizon BMO Low Volatility is expected to generate 1.01 times more return on investment than IShares ESG. However, BMO Low is 1.01 times more volatile than iShares ESG Advanced. It trades about 0.23 of its potential returns per unit of risk. iShares ESG Advanced is currently generating about 0.12 per unit of risk. If you would invest  2,602  in BMO Low Volatility on December 4, 2024 and sell it today you would earn a total of  235.00  from holding BMO Low Volatility or generate 9.03% return on investment over 90 days.

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

BMO Low Volatility  vs.  iShares ESG Advanced

BMO Low Volatility

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Low Volatility are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating forward indicators, BMO Low may actually be approaching a critical reversion point that can send shares even higher in April 2025.

iShares ESG Advanced

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares ESG Advanced are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares ESG 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 Low and IShares ESG

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

The idea behind BMO Low Volatility and iShares ESG Advanced 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.