Correlation Between BMO SP and IShares SPTSX

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

Diversification Opportunities for BMO SP and IShares SPTSX

-0.13

Correlation Coefficient

BMO SP  IShares SPTSX

Good diversification

The 3 months correlation between BMO and IShares is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and iShares SPTSX Capped in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SPTSX Capped 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 IShares SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SPTSX Capped has no effect on the direction of BMO SP i.e., BMO SP and IShares SPTSX go up and down completely randomly.

Pair Corralation between BMO SP and IShares SPTSX

Assuming the 90 days trading horizon BMO SP 500 is expected to generate 0.74 times more return on investment than IShares SPTSX. However, BMO SP 500 is 1.36 times less risky than IShares SPTSX. It trades about 0.17 of its potential returns per unit of risk. iShares SPTSX Capped is currently generating about 0.03 per unit of risk. If you would invest  8,822  in BMO SP 500 on October 26, 2024 and sell it today you would earn a total of  790.00  from holding BMO SP 500 or generate 8.95% return on investment over 90 days.

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

BMO SP 500  vs.  iShares SPTSX Capped

BMO SP 500

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 13 (%) 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 February 2025.

iShares SPTSX Capped

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SPTSX Capped are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, IShares SPTSX 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 IShares SPTSX

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

The idea behind BMO SP 500 and iShares SPTSX Capped 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.