Correlation Between BMO Aggregate and US Financial

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

By analyzing existing cross correlation between BMO Aggregate Bond and US Financial 15, you can compare the effects of market volatilities on BMO Aggregate and US Financial 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 Aggregate with a short position of US Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Aggregate and US Financial.

Diversification Opportunities for BMO Aggregate and US Financial

0.01

Correlation Coefficient

BMO Aggregate  US Financial

Significant diversification

The 3 months correlation between BMO and FTU-PB is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding BMO Aggregate Bond and US Financial 15 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Financial 15 and BMO Aggregate 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 Aggregate Bond are associated (or correlated) with US Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Financial 15 has no effect on the direction of BMO Aggregate i.e., BMO Aggregate and US Financial go up and down completely randomly.

Pair Corralation between BMO Aggregate and US Financial

Assuming the 90 days trading horizon BMO Aggregate Bond is expected to generate 0.21 times more return on investment than US Financial. However, BMO Aggregate Bond is 4.69 times less risky than US Financial. It trades about -0.11 of its potential returns per unit of risk. US Financial 15 is currently generating about -0.1 per unit of risk. If you would invest  3,015  in BMO Aggregate Bond on October 7, 2024 and sell it today you would lose (36.00) from holding BMO Aggregate Bond or give up 1.19% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	97.56%
Values	Daily Returns

BMO Aggregate Bond  vs.  US Financial 15

BMO Aggregate Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO Aggregate Bond has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, BMO Aggregate is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

US Financial 15

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in US Financial 15 are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, US Financial may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with BMO Aggregate and US Financial

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

The idea behind BMO Aggregate Bond and US Financial 15 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.