Correlation Between US Financial and Bank of Montreal

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

By analyzing existing cross correlation between US Financial 15 and Bank of Montreal, you can compare the effects of market volatilities on US Financial and Bank of Montreal 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 US Financial with a short position of Bank of Montreal. Check out your portfolio center. Please also check ongoing floating volatility patterns of US Financial and Bank of Montreal.

Diversification Opportunities for US Financial and Bank of Montreal

0.88

Correlation Coefficient

US Financial  Bank of Montreal

Very poor diversification

The 3 months correlation between FTU-PB and Bank is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding US Financial 15 and Bank of Montreal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Montreal and US Financial 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 US Financial 15 are associated (or correlated) with Bank of Montreal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Montreal has no effect on the direction of US Financial i.e., US Financial and Bank of Montreal go up and down completely randomly.

Pair Corralation between US Financial and Bank of Montreal

Assuming the 90 days trading horizon US Financial 15 is expected to generate 3.89 times more return on investment than Bank of Montreal. However, US Financial is 3.89 times more volatile than Bank of Montreal. It trades about 0.06 of its potential returns per unit of risk. Bank of Montreal is currently generating about 0.02 per unit of risk. If you would invest  744.00  in US Financial 15 on September 22, 2024 and sell it today you would earn a total of  11.00  from holding US Financial 15 or generate 1.48% return on investment over 90 days.

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

US Financial 15  vs.  Bank of Montreal

US Financial 15

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in US Financial 15 are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, US Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Bank of Montreal

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Bank of Montreal is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with US Financial and Bank of Montreal

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

The idea behind US Financial 15 and Bank of Montreal 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.