Correlation Between Dow Jones and BMO Preferred

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

By analyzing existing cross correlation between Dow Jones Industrial and BMO Preferred Share, you can compare the effects of market volatilities on Dow Jones and BMO Preferred 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 Dow Jones with a short position of BMO Preferred. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dow Jones and BMO Preferred.

Diversification Opportunities for Dow Jones and BMO Preferred

-0.38

Correlation Coefficient

Dow Jones  BMO Preferred

Very good diversification

The 3 months correlation between Dow and BMO is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding Dow Jones Industrial and BMO Preferred Share in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Preferred Share and Dow Jones 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 Dow Jones Industrial are associated (or correlated) with BMO Preferred. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Preferred Share has no effect on the direction of Dow Jones i.e., Dow Jones and BMO Preferred go up and down completely randomly.

Pair Corralation between Dow Jones and BMO Preferred

Assuming the 90 days trading horizon Dow Jones Industrial is expected to generate 1.22 times more return on investment than BMO Preferred. However, Dow Jones is 1.22 times more volatile than BMO Preferred Share. It trades about 0.1 of its potential returns per unit of risk. BMO Preferred Share is currently generating about 0.07 per unit of risk. If you would invest  3,708,200  in Dow Jones Industrial on September 15, 2024 and sell it today you would earn a total of  674,606  from holding Dow Jones Industrial or generate 18.19% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.6%
Values	Daily Returns

Dow Jones Industrial  vs.  BMO Preferred Share

Pair Trading with Dow Jones and BMO Preferred

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

The idea behind Dow Jones Industrial and BMO Preferred Share 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.