Correlation Between BMO Put and BMO Preferred

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

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

Diversification Opportunities for BMO Put and BMO Preferred

0.79

Correlation Coefficient

BMO Put  BMO Preferred

Poor diversification

The 3 months correlation between BMO and BMO is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding BMO Put Write and BMO Preferred Share in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Preferred Share and BMO Put 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 Put Write are associated (or correlated) with BMO Preferred. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Preferred Share has no effect on the direction of BMO Put i.e., BMO Put and BMO Preferred go up and down completely randomly.

Pair Corralation between BMO Put and BMO Preferred

Assuming the 90 days trading horizon BMO Put Write is expected to generate 1.44 times more return on investment than BMO Preferred. However, BMO Put is 1.44 times more volatile than BMO Preferred Share. It trades about 0.18 of its potential returns per unit of risk. BMO Preferred Share is currently generating about 0.02 per unit of risk. If you would invest  1,617  in BMO Put Write on September 15, 2024 and sell it today you would earn a total of  37.00  from holding BMO Put Write or generate 2.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.65%
Values	Daily Returns

BMO Put Write  vs.  BMO Preferred Share

BMO Put Write

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Put Write are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO Put may actually be approaching a critical reversion point that can send shares even higher in January 2025.

BMO Preferred Share

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Preferred Share are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Preferred 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 Put and BMO Preferred

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

The idea behind BMO Put Write and BMO Preferred Share 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.