Correlation Between BMO Covered and BMO Preferred
Can any of the company-specific risk be diversified away by investing in both BMO Covered and BMO Preferred 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 BMO Preferred 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 BMO Preferred Share, you can compare the effects of market volatilities on BMO Covered and BMO Preferred 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 BMO Preferred. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Covered and BMO Preferred.
Diversification Opportunities for BMO Covered and BMO Preferred
0.71 | Correlation Coefficient |
Poor diversification
The 3 months correlation between BMO and BMO is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and BMO Preferred Share in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO Preferred Share 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 BMO Preferred. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO Preferred Share has no effect on the direction of BMO Covered i.e., BMO Covered and BMO Preferred go up and down completely randomly.
Pair Corralation between BMO Covered and BMO Preferred
Assuming the 90 days trading horizon BMO Covered is expected to generate 1.08 times less return on investment than BMO Preferred. In addition to that, BMO Covered is 1.05 times more volatile than BMO Preferred Share. It trades about 0.14 of its total potential returns per unit of risk. BMO Preferred Share is currently generating about 0.16 per unit of volatility. If you would invest 1,720 in BMO Preferred Share on August 26, 2024 and sell it today you would earn a total of 475.00 from holding BMO Preferred Share or generate 27.62% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BMO Covered Call vs. BMO Preferred Share
Performance |
| Timeline |
| BMO Covered Call |
| BMO Preferred Share |
BMO Covered and BMO Preferred Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BMO Covered and BMO Preferred
The main advantage of trading using opposite BMO Covered and BMO Preferred positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO Covered position performs unexpectedly, BMO Preferred 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 Preferred will offset losses from the drop in BMO Preferred's long position.The idea behind BMO Covered Call and BMO Preferred Share 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.| BMO Preferred vs. BMO Europe High | BMO Preferred vs. BMO Equal Weight | BMO Preferred vs. BMO Covered Call |
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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