Correlation Between BMO Short and BMO Mid

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

By analyzing existing cross correlation between BMO Short Term IG and BMO Mid Term IG, you can compare the effects of market volatilities on BMO Short and BMO Mid 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 Short with a short position of BMO Mid. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Short and BMO Mid.

Diversification Opportunities for BMO Short and BMO Mid

-0.16

Correlation Coefficient

BMO Short  BMO Mid

Good diversification

The 3 months correlation between BMO and BMO is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding BMO Short Term IG and BMO Mid Term IG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Mid Term and BMO Short 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 Short Term IG are associated (or correlated) with BMO Mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Mid Term has no effect on the direction of BMO Short i.e., BMO Short and BMO Mid go up and down completely randomly.

Pair Corralation between BMO Short and BMO Mid

Assuming the 90 days trading horizon BMO Short is expected to generate 1.62 times less return on investment than BMO Mid. But when comparing it to its historical volatility, BMO Short Term IG is 2.04 times less risky than BMO Mid. It trades about 0.08 of its potential returns per unit of risk. BMO Mid Term IG is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,599  in BMO Mid Term IG on September 4, 2024 and sell it today you would earn a total of  241.00  from holding BMO Mid Term IG or generate 15.07% return on investment over 90 days.

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

BMO Short Term IG  vs.  BMO Mid Term IG

BMO Short Term

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Short Term IG are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Short is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO Mid Term

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Mid Term IG are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, BMO Mid 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 Short and BMO Mid

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

The idea behind BMO Short Term IG and BMO Mid Term IG 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.