Correlation Between BMO Aggregate and BMO MSCI

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

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

Diversification Opportunities for BMO Aggregate and BMO MSCI

0.21

Correlation Coefficient

BMO Aggregate  BMO MSCI

Modest diversification

The 3 months correlation between BMO and BMO is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding BMO Aggregate Bond and BMO MSCI USA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO MSCI USA and BMO Aggregate 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 Aggregate Bond are associated (or correlated) with BMO MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO MSCI USA has no effect on the direction of BMO Aggregate i.e., BMO Aggregate and BMO MSCI go up and down completely randomly.

Pair Corralation between BMO Aggregate and BMO MSCI

Assuming the 90 days trading horizon BMO Aggregate is expected to generate 5.02 times less return on investment than BMO MSCI. But when comparing it to its historical volatility, BMO Aggregate Bond is 1.72 times less risky than BMO MSCI. It trades about 0.05 of its potential returns per unit of risk. BMO MSCI USA is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  3,513  in BMO MSCI USA on September 17, 2024 and sell it today you would earn a total of  2,579  from holding BMO MSCI USA or generate 73.41% return on investment over 90 days.

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

BMO Aggregate Bond  vs.  BMO MSCI USA

BMO Aggregate Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

BMO MSCI USA

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI USA are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO MSCI may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO Aggregate and BMO MSCI

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

The idea behind BMO Aggregate Bond and BMO MSCI USA 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.