Correlation Between BMO Equal and Vanguard FTSE

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

By analyzing existing cross correlation between BMO Equal Weight and Vanguard FTSE Canadian, you can compare the effects of market volatilities on BMO Equal and Vanguard FTSE 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 Equal with a short position of Vanguard FTSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Equal and Vanguard FTSE.

Diversification Opportunities for BMO Equal and Vanguard FTSE

0.57

Correlation Coefficient

BMO Equal  Vanguard FTSE

Very weak diversification

The 3 months correlation between BMO and Vanguard is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding BMO Equal Weight and Vanguard FTSE Canadian in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard FTSE Canadian and BMO Equal 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 Equal Weight are associated (or correlated) with Vanguard FTSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard FTSE Canadian has no effect on the direction of BMO Equal i.e., BMO Equal and Vanguard FTSE go up and down completely randomly.

Pair Corralation between BMO Equal and Vanguard FTSE

Assuming the 90 days trading horizon BMO Equal Weight is expected to under-perform the Vanguard FTSE. In addition to that, BMO Equal is 1.75 times more volatile than Vanguard FTSE Canadian. It trades about -0.05 of its total potential returns per unit of risk. Vanguard FTSE Canadian is currently generating about -0.07 per unit of volatility. If you would invest  5,067  in Vanguard FTSE Canadian on November 29, 2024 and sell it today you would lose (108.00) from holding Vanguard FTSE Canadian or give up 2.13% of portfolio value over 90 days.

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

BMO Equal Weight  vs.  Vanguard FTSE Canadian

BMO Equal Weight

Risk-Adjusted Performance

Very Weak

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

Vanguard FTSE Canadian

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard FTSE Canadian has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Vanguard FTSE 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 Equal and Vanguard FTSE

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

The idea behind BMO Equal Weight and Vanguard FTSE Canadian 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.