Correlation Between BMO SP and BMO SPTSX

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

Diversification Opportunities for BMO SP and BMO SPTSX

0.63

Correlation Coefficient

BMO SP  BMO SPTSX

Poor diversification

The 3 months correlation between BMO and BMO is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and BMO SPTSX Capped in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO 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 BMO SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SPTSX Capped has no effect on the direction of BMO SP i.e., BMO SP and BMO SPTSX go up and down completely randomly.

Pair Corralation between BMO SP and BMO SPTSX

Assuming the 90 days trading horizon BMO SP 500 is expected to under-perform the BMO SPTSX. In addition to that, BMO SP is 1.16 times more volatile than BMO SPTSX Capped. It trades about -0.06 of its total potential returns per unit of risk. BMO SPTSX Capped is currently generating about 0.06 per unit of volatility. If you would invest  3,289  in BMO SPTSX Capped on December 28, 2024 and sell it today you would earn a total of  92.00  from holding BMO SPTSX Capped or generate 2.8% 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.  BMO SPTSX Capped

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.

BMO SPTSX Capped

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SPTSX Capped are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO 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 BMO SPTSX

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

The idea behind BMO SP 500 and BMO 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.