Correlation Between BMO Short and BMO MSCI

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

By analyzing existing cross correlation between BMO Short Term Bond and BMO MSCI USA, you can compare the effects of market volatilities on BMO Short and BMO MSCI 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 Short with a short position of BMO MSCI. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Short and BMO MSCI.

Diversification Opportunities for BMO Short and BMO MSCI

0.02

Correlation Coefficient

BMO Short  BMO MSCI

Significant diversification

The 3 months correlation between BMO and BMO is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding BMO Short Term Bond and BMO MSCI USA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO MSCI USA and BMO Short 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 Short Term Bond are associated (or correlated) with BMO MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO MSCI USA has no effect on the direction of BMO Short i.e., BMO Short and BMO MSCI go up and down completely randomly.

Pair Corralation between BMO Short and BMO MSCI

Assuming the 90 days trading horizon BMO Short Term Bond is expected to generate 0.19 times more return on investment than BMO MSCI. However, BMO Short Term Bond is 5.24 times less risky than BMO MSCI. It trades about 0.2 of its potential returns per unit of risk. BMO MSCI USA is currently generating about -0.07 per unit of risk. If you would invest  4,823  in BMO Short Term Bond on December 19, 2024 and sell it today you would earn a total of  94.00  from holding BMO Short Term Bond or generate 1.95% return on investment over 90 days.

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

BMO Short Term Bond  vs.  BMO MSCI USA

BMO Short Term

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Short Term Bond are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Short is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO MSCI USA

Risk-Adjusted Performance

Very Weak

Over the last 90 days BMO MSCI USA has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Pair Trading with BMO Short and BMO MSCI

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

The idea behind BMO Short Term Bond and BMO MSCI USA 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.