Correlation Between BMO Covered and Invesco FTSE

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

By analyzing existing cross correlation between BMO Covered Call and Invesco FTSE RAFI, you can compare the effects of market volatilities on BMO Covered and Invesco FTSE 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 Covered with a short position of Invesco FTSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Covered and Invesco FTSE.

Diversification Opportunities for BMO Covered and Invesco FTSE

0.84

Correlation Coefficient

BMO Covered  Invesco FTSE

Very poor diversification

The 3 months correlation between BMO and Invesco is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and Invesco FTSE RAFI in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco FTSE RAFI and BMO Covered 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 Covered Call are associated (or correlated) with Invesco FTSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco FTSE RAFI has no effect on the direction of BMO Covered i.e., BMO Covered and Invesco FTSE go up and down completely randomly.

Pair Corralation between BMO Covered and Invesco FTSE

Assuming the 90 days trading horizon BMO Covered Call is expected to under-perform the Invesco FTSE. But the etf apears to be less risky and, when comparing its historical volatility, BMO Covered Call is 1.28 times less risky than Invesco FTSE. The etf trades about -0.15 of its potential returns per unit of risk. The Invesco FTSE RAFI is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  3,594  in Invesco FTSE RAFI on October 10, 2024 and sell it today you would lose (25.00) from holding Invesco FTSE RAFI or give up 0.7% of portfolio value over 90 days.

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

BMO Covered Call  vs.  Invesco FTSE RAFI

BMO Covered Call

Risk-Adjusted Performance

0 of 100

Very Weak

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

Invesco FTSE RAFI

Risk-Adjusted Performance

4 of 100

Insignificant

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

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

The idea behind BMO Covered Call and Invesco FTSE RAFI 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 Valuation module to check real value of public entities based on technical and fundamental data.