Correlation Between BMO Covered and IShares Equal

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

Diversification Opportunities for BMO Covered and IShares Equal

0.98

Correlation Coefficient

BMO Covered  IShares Equal

Almost no diversification

The 3 months correlation between BMO and IShares is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and iShares Equal Weight in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Equal Weight 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 IShares Equal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Equal Weight has no effect on the direction of BMO Covered i.e., BMO Covered and IShares Equal go up and down completely randomly.

Pair Corralation between BMO Covered and IShares Equal

Assuming the 90 days trading horizon BMO Covered Call is expected to generate 0.72 times more return on investment than IShares Equal. However, BMO Covered Call is 1.39 times less risky than IShares Equal. It trades about -0.09 of its potential returns per unit of risk. iShares Equal Weight is currently generating about -0.13 per unit of risk. If you would invest  2,002  in BMO Covered Call on September 23, 2024 and sell it today you would lose (14.00) from holding BMO Covered Call or give up 0.7% of portfolio value over 90 days.

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

BMO Covered Call  vs.  iShares Equal Weight

BMO Covered Call

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Covered Call are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Covered is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

iShares Equal Weight

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Equal Weight are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares Equal may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO Covered and IShares Equal

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

The idea behind BMO Covered Call and iShares Equal Weight 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.