Correlation Between GM and BMO Preferred

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

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

Diversification Opportunities for GM and BMO Preferred

-0.53

Correlation Coefficient

GM  BMO Preferred

Excellent diversification

The 3 months correlation between GM and BMO is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding General Motors 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 GM 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 General Motors 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 GM i.e., GM and BMO Preferred go up and down completely randomly.

Pair Corralation between GM and BMO Preferred

Allowing for the 90-day total investment horizon General Motors is expected to generate 3.46 times more return on investment than BMO Preferred. However, GM is 3.46 times more volatile than BMO Preferred Share. It trades about 0.09 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  3,511  in General Motors on September 15, 2024 and sell it today you would earn a total of  1,742  from holding General Motors or generate 49.62% return on investment over 90 days.

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

General Motors  vs.  BMO Preferred Share

General Motors

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

BMO Preferred Share

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO Preferred Share has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, BMO Preferred is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with GM and BMO Preferred

The main advantage of trading using opposite GM and BMO Preferred positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM 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 General Motors 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.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.