Correlation Between Vanguard Total and BMO SP

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

By analyzing existing cross correlation between Vanguard Total Market and BMO SP 500, you can compare the effects of market volatilities on Vanguard Total and BMO SP 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 Vanguard Total with a short position of BMO SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Total and BMO SP.

Diversification Opportunities for Vanguard Total and BMO SP

1.0

Correlation Coefficient

Vanguard Total  BMO SP

No risk reduction

The 3 months correlation between Vanguard and BMO is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total Market and BMO SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SP 500 and Vanguard Total 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 Vanguard Total Market are associated (or correlated) with BMO SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SP 500 has no effect on the direction of Vanguard Total i.e., Vanguard Total and BMO SP go up and down completely randomly.

Pair Corralation between Vanguard Total and BMO SP

Assuming the 90 days trading horizon Vanguard Total Market is expected to generate 1.05 times more return on investment than BMO SP. However, Vanguard Total is 1.05 times more volatile than BMO SP 500. It trades about 0.26 of its potential returns per unit of risk. BMO SP 500 is currently generating about 0.23 per unit of risk. If you would invest  10,825  in Vanguard Total Market on August 29, 2024 and sell it today you would earn a total of  610.00  from holding Vanguard Total Market or generate 5.64% return on investment over 90 days.

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

Vanguard Total Market  vs.  BMO SP 500

Vanguard Total Market

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total Market are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Vanguard Total displayed solid returns over the last few months and may actually be approaching a breakup point.

BMO SP 500

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SP may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Vanguard Total and BMO SP

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

The idea behind Vanguard Total Market and BMO SP 500 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.