Correlation Between BMO Tactical and BMO Equal

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

By analyzing existing cross correlation between BMO Tactical Dividend and BMO Equal Weight, you can compare the effects of market volatilities on BMO Tactical and BMO 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 Tactical with a short position of BMO Equal. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Tactical and BMO Equal.

Diversification Opportunities for BMO Tactical and BMO Equal

0.83

Correlation Coefficient

BMO Tactical  BMO Equal

Very poor diversification

The 3 months correlation between BMO and BMO is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding BMO Tactical Dividend and BMO Equal Weight in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Equal Weight and BMO Tactical 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 Tactical Dividend are associated (or correlated) with BMO Equal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Equal Weight has no effect on the direction of BMO Tactical i.e., BMO Tactical and BMO Equal go up and down completely randomly.

Pair Corralation between BMO Tactical and BMO Equal

Assuming the 90 days trading horizon BMO Tactical is expected to generate 5.67 times less return on investment than BMO Equal. But when comparing it to its historical volatility, BMO Tactical Dividend is 3.96 times less risky than BMO Equal. It trades about 0.19 of its potential returns per unit of risk. BMO Equal Weight is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  10,070  in BMO Equal Weight on December 28, 2024 and sell it today you would earn a total of  3,574  from holding BMO Equal Weight or generate 35.49% return on investment over 90 days.

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

BMO Tactical Dividend  vs.  BMO Equal Weight

BMO Tactical Dividend

Risk-Adjusted Performance

Good

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

BMO Equal Weight

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Equal Weight are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating fundamental indicators, BMO Equal displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BMO Tactical and BMO Equal

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

The idea behind BMO Tactical Dividend and BMO 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.