Correlation Between BMO Europe and Vanguard FTSE

Can any of the company-specific risk be diversified away by investing in both BMO Europe and Vanguard 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 Europe and Vanguard FTSE 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 Vanguard FTSE Developed, you can compare the effects of market volatilities on BMO Europe and Vanguard 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 Europe with a short position of Vanguard FTSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Europe and Vanguard FTSE.

Diversification Opportunities for BMO Europe and Vanguard FTSE

0.95

Correlation Coefficient

BMO Europe  Vanguard FTSE

Almost no diversification

The 3 months correlation between BMO and Vanguard is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding BMO Europe High and Vanguard FTSE Developed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard FTSE Developed 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 Vanguard FTSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard FTSE Developed has no effect on the direction of BMO Europe i.e., BMO Europe and Vanguard FTSE go up and down completely randomly.

Pair Corralation between BMO Europe and Vanguard FTSE

Assuming the 90 days trading horizon BMO Europe High is expected to under-perform the Vanguard FTSE. In addition to that, BMO Europe is 1.03 times more volatile than Vanguard FTSE Developed. It trades about -0.05 of its total potential returns per unit of risk. Vanguard FTSE Developed is currently generating about -0.03 per unit of volatility. If you would invest  3,635  in Vanguard FTSE Developed on August 31, 2024 and sell it today you would lose (60.00) from holding Vanguard FTSE Developed or give up 1.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.41%
Values	Daily Returns

BMO Europe High  vs.  Vanguard FTSE Developed

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 basic indicators, BMO Europe is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Vanguard FTSE Developed

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind BMO Europe High and Vanguard FTSE Developed 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.