Correlation Between BMO Equal and First Trust

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

By analyzing existing cross correlation between BMO Equal Weight and First Trust AlphaDEX, you can compare the effects of market volatilities on BMO Equal and First Trust 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 Equal with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Equal and First Trust.

Diversification Opportunities for BMO Equal and First Trust

0.07

Correlation Coefficient

BMO Equal  First Trust

Significant diversification

The 3 months correlation between BMO and First is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding BMO Equal Weight and First Trust AlphaDEX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust AlphaDEX and BMO Equal 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 Equal Weight are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust AlphaDEX has no effect on the direction of BMO Equal i.e., BMO Equal and First Trust go up and down completely randomly.

Pair Corralation between BMO Equal and First Trust

Assuming the 90 days trading horizon BMO Equal Weight is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, BMO Equal Weight is 1.42 times less risky than First Trust. The etf trades about -0.01 of its potential returns per unit of risk. The First Trust AlphaDEX is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  9,299  in First Trust AlphaDEX on October 24, 2024 and sell it today you would earn a total of  1,347  from holding First Trust AlphaDEX or generate 14.49% return on investment over 90 days.

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

BMO Equal Weight  vs.  First Trust AlphaDEX

BMO Equal Weight

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO Equal Weight has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, BMO Equal is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

First Trust AlphaDEX

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust AlphaDEX are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BMO Equal and First Trust

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

The idea behind BMO Equal Weight and First Trust AlphaDEX 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .