Correlation Between BMO Long and BMO Short
Can any of the company-specific risk be diversified away by investing in both BMO Long 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 Long 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 Long Corporate and BMO Short Federal, you can compare the effects of market volatilities on BMO Long 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 Long with a short position of BMO Short. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Long and BMO Short.
Diversification Opportunities for BMO Long and BMO Short
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 Long Corporate and BMO Short Federal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Short Federal and BMO Long 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 Long Corporate 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 Federal has no effect on the direction of BMO Long i.e., BMO Long and BMO Short go up and down completely randomly.
Pair Corralation between BMO Long and BMO Short
Assuming the 90 days trading horizon BMO Long Corporate is expected to generate 5.25 times more return on investment than BMO Short. However, BMO Long is 5.25 times more volatile than BMO Short Federal. It trades about 0.2 of its potential returns per unit of risk. BMO Short Federal is currently generating about 0.12 per unit of risk. 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 Long Corporate vs. BMO Short Federal
Performance |
| Timeline |
| BMO Long Corporate |
| BMO Short Federal |
BMO Long and BMO Short Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BMO Long and BMO Short
The main advantage of trading using opposite BMO Long and BMO Short positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO Long 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 Long vs. BMO Mid Corporate | BMO Long vs. BMO Short Corporate | BMO Long vs. BMO High Yield | BMO Long vs. BMO Long Provincial |
| 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 |
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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.
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