Correlation Between BMO MSCI and Wealthsimple Developed

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

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

Diversification Opportunities for BMO MSCI and Wealthsimple Developed

0.95

Correlation Coefficient

BMO MSCI  Wealthsimple Developed

Almost no diversification

The 3 months correlation between BMO and Wealthsimple is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI EAFE and Wealthsimple Developed Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wealthsimple Developed and BMO MSCI 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 MSCI EAFE are associated (or correlated) with Wealthsimple Developed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wealthsimple Developed has no effect on the direction of BMO MSCI i.e., BMO MSCI and Wealthsimple Developed go up and down completely randomly.

Pair Corralation between BMO MSCI and Wealthsimple Developed

Assuming the 90 days trading horizon BMO MSCI EAFE is expected to generate 0.96 times more return on investment than Wealthsimple Developed. However, BMO MSCI EAFE is 1.04 times less risky than Wealthsimple Developed. It trades about 0.05 of its potential returns per unit of risk. Wealthsimple Developed Markets is currently generating about 0.01 per unit of risk. If you would invest  2,331  in BMO MSCI EAFE on September 13, 2024 and sell it today you would earn a total of  47.00  from holding BMO MSCI EAFE or generate 2.02% return on investment over 90 days.

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

BMO MSCI EAFE  vs.  Wealthsimple Developed Markets

BMO MSCI EAFE

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI EAFE are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO MSCI is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Wealthsimple Developed

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Wealthsimple Developed Markets has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Wealthsimple Developed 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 MSCI and Wealthsimple Developed

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

The idea behind BMO MSCI EAFE and Wealthsimple Developed Markets 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.