Correlation Between BMO Corporate and IShares Canadian

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

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

Diversification Opportunities for BMO Corporate and IShares Canadian

0.88

Correlation Coefficient

BMO Corporate  IShares Canadian

Very poor diversification

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

Pair Corralation between BMO Corporate and IShares Canadian

Assuming the 90 days trading horizon BMO Corporate Bond is expected to generate 0.77 times more return on investment than IShares Canadian. However, BMO Corporate Bond is 1.31 times less risky than IShares Canadian. It trades about 0.07 of its potential returns per unit of risk. iShares Canadian Universe is currently generating about 0.0 per unit of risk. If you would invest  4,721  in BMO Corporate Bond on September 14, 2024 and sell it today you would earn a total of  59.00  from holding BMO Corporate Bond or generate 1.25% return on investment over 90 days.

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

BMO Corporate Bond  vs.  iShares Canadian Universe

BMO Corporate Bond

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Corporate Bond are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, BMO Corporate is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

iShares Canadian Universe

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with BMO Corporate and IShares Canadian

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

The idea behind BMO Corporate Bond and iShares Canadian Universe 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.