Correlation Between BMO Covered and BMO SPTSX

Can any of the company-specific risk be diversified away by investing in both BMO Covered and BMO SPTSX 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 SPTSX 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 SPTSX Equal, you can compare the effects of market volatilities on BMO Covered and BMO SPTSX 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 SPTSX. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Covered and BMO SPTSX.

Diversification Opportunities for BMO Covered and BMO SPTSX

0.23

Correlation Coefficient

BMO Covered  BMO SPTSX

Modest diversification

The 3 months correlation between BMO and BMO is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding BMO Covered Call and BMO SPTSX Equal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BMO SPTSX Equal 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 SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BMO SPTSX Equal has no effect on the direction of BMO Covered i.e., BMO Covered and BMO SPTSX go up and down completely randomly.

Pair Corralation between BMO Covered and BMO SPTSX

Assuming the 90 days trading horizon BMO Covered is expected to generate 3.73 times less return on investment than BMO SPTSX. But when comparing it to its historical volatility, BMO Covered Call is 1.06 times less risky than BMO SPTSX. It trades about 0.01 of its potential returns per unit of risk. BMO SPTSX Equal is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,166  in BMO SPTSX Equal on April 2, 2024 and sell it today you would earn a total of  311.00  from holding BMO SPTSX Equal or generate 9.82% return on investment over 90 days.

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

BMO Covered Call  vs.  BMO SPTSX Equal

BMO Covered Call

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Covered Call are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, BMO Covered is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

BMO SPTSX Equal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BMO SPTSX Equal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental drivers, BMO SPTSX 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 Covered and BMO SPTSX

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

The idea behind BMO Covered Call and BMO SPTSX Equal 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.