Correlation Between BMO Aggregate and BMO Discount

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

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

Diversification Opportunities for BMO Aggregate and BMO Discount

0.4

Correlation Coefficient

BMO Aggregate  BMO Discount

Very weak diversification

The 3 months correlation between BMO and BMO is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding BMO Aggregate Bond and BMO Discount Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Discount Bond and BMO Aggregate 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 Aggregate Bond are associated (or correlated) with BMO Discount. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Discount Bond has no effect on the direction of BMO Aggregate i.e., BMO Aggregate and BMO Discount go up and down completely randomly.

Pair Corralation between BMO Aggregate and BMO Discount

Assuming the 90 days trading horizon BMO Aggregate Bond is expected to under-perform the BMO Discount. But the etf apears to be less risky and, when comparing its historical volatility, BMO Aggregate Bond is 1.2 times less risky than BMO Discount. The etf trades about -0.19 of its potential returns per unit of risk. The BMO Discount Bond is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,514  in BMO Discount Bond on September 18, 2024 and sell it today you would earn a total of  3.00  from holding BMO Discount Bond or generate 0.2% return on investment over 90 days.

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

BMO Aggregate Bond  vs.  BMO Discount Bond

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.

BMO Discount Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO Discount Bond has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental drivers, BMO Discount 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 Aggregate and BMO Discount

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

The idea behind BMO Aggregate Bond and BMO Discount 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.