Correlation Between BMO Short and BMO MSCI

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

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

Diversification Opportunities for BMO Short and BMO MSCI

0.38

Correlation Coefficient

BMO Short  BMO MSCI

Weak diversification

The 3 months correlation between BMO and BMO is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding BMO Short Term Bond and BMO MSCI EAFE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO MSCI EAFE and BMO Short 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 Short Term Bond are associated (or correlated) with BMO MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO MSCI EAFE has no effect on the direction of BMO Short i.e., BMO Short and BMO MSCI go up and down completely randomly.

Pair Corralation between BMO Short and BMO MSCI

Assuming the 90 days trading horizon BMO Short is expected to generate 4.91 times less return on investment than BMO MSCI. But when comparing it to its historical volatility, BMO Short Term Bond is 3.7 times less risky than BMO MSCI. It trades about 0.05 of its potential returns per unit of risk. BMO MSCI EAFE is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,921  in BMO MSCI EAFE on September 18, 2024 and sell it today you would earn a total of  79.00  from holding BMO MSCI EAFE or generate 2.7% return on investment over 90 days.

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

BMO Short Term Bond  vs.  BMO MSCI EAFE

BMO Short Term

Risk-Adjusted Performance

4 of 100

Insignificant

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

BMO MSCI EAFE

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO MSCI EAFE are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy primary indicators, BMO MSCI 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 Short and BMO MSCI

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

The idea behind BMO Short Term Bond and BMO MSCI EAFE 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.