Correlation Between BMO NASDAQ and IShares China

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

Diversification Opportunities for BMO NASDAQ and IShares China

0.63

Correlation Coefficient

BMO NASDAQ  IShares China

Poor diversification

The 3 months correlation between BMO and IShares is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding BMO NASDAQ 100 and iShares China in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares China 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 China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares China has no effect on the direction of BMO NASDAQ i.e., BMO NASDAQ and IShares China go up and down completely randomly.

Pair Corralation between BMO NASDAQ and IShares China

Assuming the 90 days trading horizon BMO NASDAQ is expected to generate 1.98 times less return on investment than IShares China. But when comparing it to its historical volatility, BMO NASDAQ 100 is 2.92 times less risky than IShares China. It trades about 0.17 of its potential returns per unit of risk. iShares China is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,670  in iShares China on September 4, 2024 and sell it today you would earn a total of  359.00  from holding iShares China or generate 21.5% return on investment over 90 days.

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

BMO NASDAQ 100  vs.  iShares China

BMO NASDAQ 100

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO NASDAQ 100 are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO NASDAQ may actually be approaching a critical reversion point that can send shares even higher in January 2025.

iShares China

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares China are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical indicators, IShares China displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BMO NASDAQ and IShares China

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

The idea behind BMO NASDAQ 100 and iShares China 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 Valuation module to check real value of public entities based on technical and fundamental data.