Correlation Between BMO SP and CIBC Equity

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

By analyzing existing cross correlation between BMO SP 500 and CIBC Equity Index, you can compare the effects of market volatilities on BMO SP and CIBC Equity 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 SP with a short position of CIBC Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO SP and CIBC Equity.

Diversification Opportunities for BMO SP and CIBC Equity

0.74

Correlation Coefficient

BMO SP  CIBC Equity

Poor diversification

The 3 months correlation between BMO and CIBC is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and CIBC Equity Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CIBC Equity Index and BMO SP 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 SP 500 are associated (or correlated) with CIBC Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CIBC Equity Index has no effect on the direction of BMO SP i.e., BMO SP and CIBC Equity go up and down completely randomly.

Pair Corralation between BMO SP and CIBC Equity

Assuming the 90 days trading horizon BMO SP 500 is expected to generate 0.93 times more return on investment than CIBC Equity. However, BMO SP 500 is 1.07 times less risky than CIBC Equity. It trades about -0.08 of its potential returns per unit of risk. CIBC Equity Index is currently generating about -0.08 per unit of risk. If you would invest  9,227  in BMO SP 500 on December 19, 2024 and sell it today you would lose (441.00) from holding BMO SP 500 or give up 4.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

BMO SP 500  vs.  CIBC Equity Index

BMO SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days BMO SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, BMO SP is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

CIBC Equity Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days CIBC Equity Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, CIBC Equity is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BMO SP and CIBC Equity

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

The idea behind BMO SP 500 and CIBC Equity Index 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.