Correlation Between BMO Covered and First Trust

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

Diversification Opportunities for BMO Covered and First Trust

-0.4

Correlation Coefficient

BMO Covered  First Trust

Very good diversification

The 3 months correlation between BMO and First is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and First Trust NASDAQ in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ 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 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 NASDAQ has no effect on the direction of BMO Covered i.e., BMO Covered and First Trust go up and down completely randomly.

Pair Corralation between BMO Covered and First Trust

Assuming the 90 days trading horizon BMO Covered Call is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, BMO Covered Call is 2.31 times less risky than First Trust. The etf trades about -0.11 of its potential returns per unit of risk. The First Trust NASDAQ is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  4,573  in First Trust NASDAQ on October 1, 2024 and sell it today you would earn a total of  833.00  from holding First Trust NASDAQ or generate 18.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

BMO Covered Call  vs.  First Trust NASDAQ

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.

First Trust NASDAQ

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days First Trust NASDAQ has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very weak fundamental indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BMO Covered and First Trust

The main advantage of trading using opposite BMO Covered and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO Covered 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 Covered Call and First Trust NASDAQ 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.