Correlation Between BMO NASDAQ and IShares SPTSX

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

By analyzing existing cross correlation between BMO NASDAQ 100 and iShares SPTSX Small, you can compare the effects of market volatilities on BMO NASDAQ and IShares SPTSX 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 NASDAQ with a short position of IShares SPTSX. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO NASDAQ and IShares SPTSX.

Diversification Opportunities for BMO NASDAQ and IShares SPTSX

0.84

Correlation Coefficient

BMO NASDAQ  IShares SPTSX

Very poor diversification

The 3 months correlation between BMO and IShares is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding BMO NASDAQ 100 and iShares SPTSX Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SPTSX Small and BMO NASDAQ 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 NASDAQ 100 are associated (or correlated) with IShares SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SPTSX Small has no effect on the direction of BMO NASDAQ i.e., BMO NASDAQ and IShares SPTSX go up and down completely randomly.

Pair Corralation between BMO NASDAQ and IShares SPTSX

Assuming the 90 days trading horizon BMO NASDAQ 100 is expected to generate 1.22 times more return on investment than IShares SPTSX. However, BMO NASDAQ is 1.22 times more volatile than iShares SPTSX Small. It trades about 0.22 of its potential returns per unit of risk. iShares SPTSX Small is currently generating about 0.21 per unit of risk. If you would invest  8,313  in BMO NASDAQ 100 on September 3, 2024 and sell it today you would earn a total of  1,181  from holding BMO NASDAQ 100 or generate 14.21% return on investment over 90 days.

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

BMO NASDAQ 100  vs.  iShares SPTSX Small

BMO NASDAQ 100

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO NASDAQ 100 are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO NASDAQ displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares SPTSX Small

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SPTSX Small are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares SPTSX may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO NASDAQ and IShares SPTSX

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

The idea behind BMO NASDAQ 100 and iShares SPTSX Small 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 Stocks Directory module to find actively traded stocks across global markets.