Correlation Between BMO MSCI and Energy Income

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

By analyzing existing cross correlation between BMO MSCI All and Energy Income, you can compare the effects of market volatilities on BMO MSCI and Energy Income 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 Energy Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO MSCI and Energy Income.

Diversification Opportunities for BMO MSCI and Energy Income

0.8

Correlation Coefficient

BMO MSCI  Energy Income

Very poor diversification

The 3 months correlation between BMO and Energy is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding BMO MSCI All and Energy Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Income 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 All are associated (or correlated) with Energy Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Income has no effect on the direction of BMO MSCI i.e., BMO MSCI and Energy Income go up and down completely randomly.

Pair Corralation between BMO MSCI and Energy Income

Assuming the 90 days trading horizon BMO MSCI is expected to generate 1.33 times less return on investment than Energy Income. But when comparing it to its historical volatility, BMO MSCI All is 2.75 times less risky than Energy Income. It trades about 0.16 of its potential returns per unit of risk. Energy Income is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  160.00  in Energy Income on September 3, 2024 and sell it today you would earn a total of  14.00  from holding Energy Income or generate 8.75% return on investment over 90 days.

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

BMO MSCI All  vs.  Energy Income

BMO MSCI All

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI All are ranked lower than 12 (%) 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.

Energy Income

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Income are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak forward indicators, Energy Income may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BMO MSCI and Energy Income

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

The idea behind BMO MSCI All and Energy Income 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.