Correlation Between BMO Long and RBC Discount

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

By analyzing existing cross correlation between BMO Long Federal and RBC Discount Bond, you can compare the effects of market volatilities on BMO Long and RBC Discount 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 RBC Discount. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Long and RBC Discount.

Diversification Opportunities for BMO Long and RBC Discount

0.78

Correlation Coefficient

BMO Long  RBC Discount

Poor diversification

The 3 months correlation between BMO and RBC is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding BMO Long Federal and RBC Discount Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RBC Discount Bond 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 Federal are associated (or correlated) with RBC Discount. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RBC Discount Bond has no effect on the direction of BMO Long i.e., BMO Long and RBC Discount go up and down completely randomly.

Pair Corralation between BMO Long and RBC Discount

Assuming the 90 days trading horizon BMO Long Federal is expected to generate 3.3 times more return on investment than RBC Discount. However, BMO Long is 3.3 times more volatile than RBC Discount Bond. It trades about 0.03 of its potential returns per unit of risk. RBC Discount Bond is currently generating about 0.07 per unit of risk. If you would invest  1,222  in BMO Long Federal on July 3, 2024 and sell it today you would earn a total of  134.00  from holding BMO Long Federal or generate 10.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	69.15%
Values	Daily Returns

BMO Long Federal  vs.  RBC Discount Bond

BMO Long Federal

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Long Federal are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating essential indicators, BMO Long may actually be approaching a critical reversion point that can send shares even higher in November 2024.

RBC Discount Bond

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in RBC Discount Bond are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, RBC Discount is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with BMO Long and RBC Discount

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

The idea behind BMO Long Federal and RBC Discount Bond 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.