Correlation Between BMO Floating and BMO Short
Can any of the company-specific risk be diversified away by investing in both BMO Floating and BMO Short 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 Floating and BMO Short into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BMO Floating Rate and BMO Short Term IG, you can compare the effects of market volatilities on BMO Floating and BMO Short 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 Floating with a short position of BMO Short. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Floating and BMO Short.
Diversification Opportunities for BMO Floating and BMO Short
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between BMO and BMO is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding BMO Floating Rate and BMO Short Term IG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Short Term and BMO Floating 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 Floating Rate are associated (or correlated) with BMO Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Short Term has no effect on the direction of BMO Floating i.e., BMO Floating and BMO Short go up and down completely randomly.
Pair Corralation between BMO Floating and BMO Short
Assuming the 90 days trading horizon BMO Floating Rate is expected to generate 1.37 times more return on investment than BMO Short. However, BMO Floating is 1.37 times more volatile than BMO Short Term IG. It trades about 0.16 of its potential returns per unit of risk. BMO Short Term IG is currently generating about 0.08 per unit of risk. If you would invest 1,196 in BMO Floating Rate on November 27, 2024 and sell it today you would earn a total of 304.00 from holding BMO Floating Rate or generate 25.42% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BMO Floating Rate vs. BMO Short Term IG
Performance |
| Timeline |
| BMO Floating Rate |
| BMO Short Term |
BMO Floating and BMO Short Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BMO Floating and BMO Short
The main advantage of trading using opposite BMO Floating and BMO Short positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO Floating position performs unexpectedly, BMO Short 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 Short will offset losses from the drop in BMO Short's long position.| BMO Floating vs. BMO Emerging Markets | BMO Floating vs. BMO Long Corporate | BMO Floating vs. BMO High Yield | BMO Floating vs. BMO Mid Corporate |
| BMO Short vs. BMO Mid Term IG | BMO Short vs. BMO Short Provincial | BMO Short vs. BMO Short Federal | BMO Short vs. BMO Floating Rate |
Check out your portfolio center.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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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