Correlation Between BMO Europe and IShares MSCI

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

By analyzing existing cross correlation between BMO Europe High and iShares MSCI Europe, you can compare the effects of market volatilities on BMO Europe and IShares MSCI 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 Europe with a short position of IShares MSCI. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Europe and IShares MSCI.

Diversification Opportunities for BMO Europe and IShares MSCI

0.91

Correlation Coefficient

BMO Europe  IShares MSCI

Almost no diversification

The 3 months correlation between BMO and IShares is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding BMO Europe High and iShares MSCI Europe in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI Europe and BMO Europe 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 Europe High are associated (or correlated) with IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI Europe has no effect on the direction of BMO Europe i.e., BMO Europe and IShares MSCI go up and down completely randomly.

Pair Corralation between BMO Europe and IShares MSCI

Assuming the 90 days trading horizon BMO Europe is expected to generate 1.26 times less return on investment than IShares MSCI. But when comparing it to its historical volatility, BMO Europe High is 1.07 times less risky than IShares MSCI. It trades about 0.05 of its potential returns per unit of risk. iShares MSCI Europe is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,569  in iShares MSCI Europe on August 31, 2024 and sell it today you would earn a total of  416.00  from holding iShares MSCI Europe or generate 16.19% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.73%
Values	Daily Returns

BMO Europe High  vs.  iShares MSCI Europe

BMO Europe High

Risk-Adjusted Performance

0 of 100

Very Weak

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

iShares MSCI Europe

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares MSCI Europe has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, IShares MSCI 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 Europe and IShares MSCI

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

The idea behind BMO Europe High and iShares MSCI Europe 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.