Correlation Between IShares SPTSX and BMO SP

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

By analyzing existing cross correlation between iShares SPTSX 60 and BMO SP 500, you can compare the effects of market volatilities on IShares SPTSX and BMO SP 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 IShares SPTSX with a short position of BMO SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares SPTSX and BMO SP.

Diversification Opportunities for IShares SPTSX and BMO SP

0.98

Correlation Coefficient

IShares SPTSX  BMO SP

Almost no diversification

The 3 months correlation between IShares and BMO is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding iShares SPTSX 60 and BMO SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SP 500 and IShares SPTSX 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 iShares SPTSX 60 are associated (or correlated) with BMO SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SP 500 has no effect on the direction of IShares SPTSX i.e., IShares SPTSX and BMO SP go up and down completely randomly.

Pair Corralation between IShares SPTSX and BMO SP

Assuming the 90 days trading horizon IShares SPTSX is expected to generate 1.33 times less return on investment than BMO SP. But when comparing it to its historical volatility, iShares SPTSX 60 is 1.54 times less risky than BMO SP. It trades about 0.32 of its potential returns per unit of risk. BMO SP 500 is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  8,350  in BMO SP 500 on September 13, 2024 and sell it today you would earn a total of  1,075  from holding BMO SP 500 or generate 12.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

iShares SPTSX 60  vs.  BMO SP 500

iShares SPTSX 60

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SPTSX 60 are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares SPTSX may actually be approaching a critical reversion point that can send shares even higher in January 2025.

BMO SP 500

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares SPTSX and BMO SP

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

The idea behind iShares SPTSX 60 and BMO SP 500 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.