Correlation Between BMO Covered and Brompton North

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

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

Diversification Opportunities for BMO Covered and Brompton North

0.91

Correlation Coefficient

BMO Covered  Brompton North

Almost no diversification

The 3 months correlation between BMO and Brompton is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and Brompton North American in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brompton North American and BMO Covered 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 Covered Call are associated (or correlated) with Brompton North. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brompton North American has no effect on the direction of BMO Covered i.e., BMO Covered and Brompton North go up and down completely randomly.

Pair Corralation between BMO Covered and Brompton North

Assuming the 90 days trading horizon BMO Covered is expected to generate 1.76 times less return on investment than Brompton North. But when comparing it to its historical volatility, BMO Covered Call is 3.8 times less risky than Brompton North. It trades about 0.43 of its potential returns per unit of risk. Brompton North American is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  2,231  in Brompton North American on September 2, 2024 and sell it today you would earn a total of  396.00  from holding Brompton North American or generate 17.75% return on investment over 90 days.

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

BMO Covered Call  vs.  Brompton North American

BMO Covered Call

Risk-Adjusted Performance

34 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Covered Call are ranked lower than 34 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating fundamental drivers, BMO Covered may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Brompton North American

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Brompton North American are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Brompton North displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BMO Covered and Brompton North

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

The idea behind BMO Covered Call and Brompton North American 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.