Correlation Between BMO Short and BMO Long
Can any of the company-specific risk be diversified away by investing in both BMO Short and BMO Long 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 Long into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BMO Short Federal and BMO Long Corporate, you can compare the effects of market volatilities on BMO Short and BMO Long 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 Long. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Short and BMO Long.
Diversification Opportunities for BMO Short and BMO Long
Poor diversification
The 3 months correlation between BMO and BMO is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding BMO Short Federal and BMO Long Corporate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Long Corporate 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 Federal are associated (or correlated) with BMO Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Long Corporate has no effect on the direction of BMO Short i.e., BMO Short and BMO Long go up and down completely randomly.
Pair Corralation between BMO Short and BMO Long
Assuming the 90 days trading horizon BMO Short is expected to generate 8.58 times less return on investment than BMO Long. But when comparing it to its historical volatility, BMO Short Federal is 5.25 times less risky than BMO Long. It trades about 0.12 of its potential returns per unit of risk. BMO Long Corporate is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest 1,532 in BMO Long Corporate on September 1, 2024 and sell it today you would earn a total of 48.00 from holding BMO Long Corporate or generate 3.13% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BMO Short Federal vs. BMO Long Corporate
Performance |
| Timeline |
| BMO Short Federal |
| BMO Long Corporate |
BMO Short and BMO Long Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BMO Short and BMO Long
The main advantage of trading using opposite BMO Short and BMO Long positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO Short position performs unexpectedly, BMO Long 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 Long will offset losses from the drop in BMO Long's long position.| BMO Short vs. Vanguard Total Market | BMO Short vs. iShares High Quality | BMO Short vs. iShares 1 10Yr Laddered | BMO Short vs. iShares Canadian HYBrid |
| BMO Long vs. BMO Mid Corporate | BMO Long vs. BMO Short Corporate | BMO Long vs. BMO High Yield | BMO Long vs. BMO Long Provincial |
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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.
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