Correlation Between BMO SP and BMO Low

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

Diversification Opportunities for BMO SP and BMO Low

0.86

Correlation Coefficient

BMO SP  BMO Low

Very poor diversification

The 3 months correlation between BMO and BMO is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and BMO Low Volatility in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Low Volatility 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 Low. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Low Volatility has no effect on the direction of BMO SP i.e., BMO SP and BMO Low go up and down completely randomly.

Pair Corralation between BMO SP and BMO Low

Assuming the 90 days trading horizon BMO SP 500 is expected to generate 1.49 times more return on investment than BMO Low. However, BMO SP is 1.49 times more volatile than BMO Low Volatility. It trades about 0.25 of its potential returns per unit of risk. BMO Low Volatility is currently generating about 0.24 per unit of risk. If you would invest  8,832  in BMO SP 500 on August 31, 2024 and sell it today you would earn a total of  480.00  from holding BMO SP 500 or generate 5.43% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.65%
Values	Daily Returns

BMO SP 500  vs.  BMO Low Volatility

BMO SP 500

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SP displayed solid returns over the last few months and may actually be approaching a breakup point.

BMO Low Volatility

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Low Volatility are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO Low may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with BMO SP and BMO Low

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

The idea behind BMO SP 500 and BMO Low Volatility 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.