Correlation Between BMO SP and First Trust

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

Diversification Opportunities for BMO SP and First Trust

0.68

Correlation Coefficient

BMO SP  First Trust

Poor diversification

The 3 months correlation between BMO and First is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and First Trust Indxx in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Indxx 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Indxx has no effect on the direction of BMO SP i.e., BMO SP and First Trust go up and down completely randomly.

Pair Corralation between BMO SP and First Trust

Assuming the 90 days trading horizon BMO SP 500 is expected to generate 1.14 times more return on investment than First Trust. However, BMO SP is 1.14 times more volatile than First Trust Indxx. It trades about 0.21 of its potential returns per unit of risk. First Trust Indxx is currently generating about 0.12 per unit of risk. If you would invest  8,436  in BMO SP 500 on September 21, 2024 and sell it today you would earn a total of  885.00  from holding BMO SP 500 or generate 10.49% return on investment over 90 days.

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

BMO SP 500  vs.  First Trust Indxx

BMO SP 500

Risk-Adjusted Performance

16 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Indxx

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Indxx are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, First Trust 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 SP and First Trust

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

The idea behind BMO SP 500 and First Trust Indxx 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.

Check out your portfolio center.

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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.