Correlation Between BMO Low and BMO Aggregate

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

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

Diversification Opportunities for BMO Low and BMO Aggregate

-0.53

Correlation Coefficient

BMO Low  BMO Aggregate

Excellent diversification

The 3 months correlation between BMO and BMO is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding BMO Low Volatility and BMO Aggregate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Aggregate Bond and BMO Low 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 Low Volatility are associated (or correlated) with BMO Aggregate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Aggregate Bond has no effect on the direction of BMO Low i.e., BMO Low and BMO Aggregate go up and down completely randomly.

Pair Corralation between BMO Low and BMO Aggregate

Assuming the 90 days trading horizon BMO Low Volatility is expected to generate 1.86 times more return on investment than BMO Aggregate. However, BMO Low is 1.86 times more volatile than BMO Aggregate Bond. It trades about 0.05 of its potential returns per unit of risk. BMO Aggregate Bond is currently generating about -0.19 per unit of risk. If you would invest  5,449  in BMO Low Volatility on September 18, 2024 and sell it today you would earn a total of  97.00  from holding BMO Low Volatility or generate 1.78% return on investment over 90 days.

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

BMO Low Volatility  vs.  BMO Aggregate Bond

BMO Low Volatility

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Low Volatility are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Low is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

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. Despite somewhat strong basic indicators, BMO Aggregate is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with BMO Low and BMO Aggregate

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

The idea behind BMO Low Volatility and BMO Aggregate Bond 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.