Correlation Between BMO SPTSX and Vanguard

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

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

Diversification Opportunities for BMO SPTSX and Vanguard

0.98

Correlation Coefficient

BMO SPTSX  Vanguard

Almost no diversification

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

Pair Corralation between BMO SPTSX and Vanguard

Assuming the 90 days trading horizon BMO SPTSX is expected to generate 1.36 times less return on investment than Vanguard. But when comparing it to its historical volatility, BMO SPTSX Capped is 1.56 times less risky than Vanguard. It trades about 0.32 of its potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  13,465  in Vanguard SP 500 on September 12, 2024 and sell it today you would earn a total of  1,736  from holding Vanguard SP 500 or generate 12.89% return on investment over 90 days.

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

BMO SPTSX Capped  vs.  Vanguard SP 500

BMO SPTSX Capped

Risk-Adjusted Performance

25 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SPTSX Capped are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SPTSX may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard SP 500

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO SPTSX and Vanguard

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

The idea behind BMO SPTSX Capped and Vanguard 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.

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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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.