Correlation Between BMO Global and TSX Industrials

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

By analyzing existing cross correlation between BMO Global Communications and TSX Industrials Capped, you can compare the effects of market volatilities on BMO Global and TSX Industrials 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 Global with a short position of TSX Industrials. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO Global and TSX Industrials.

Diversification Opportunities for BMO Global and TSX Industrials

0.72

Correlation Coefficient

BMO Global  TSX Industrials

Poor diversification

The 3 months correlation between BMO and TSX is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding BMO Global Communications and TSX Industrials Capped in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TSX Industrials Capped and BMO Global 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 Global Communications are associated (or correlated) with TSX Industrials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TSX Industrials Capped has no effect on the direction of BMO Global i.e., BMO Global and TSX Industrials go up and down completely randomly.

Pair Corralation between BMO Global and TSX Industrials

Assuming the 90 days trading horizon BMO Global is expected to generate 1.01 times less return on investment than TSX Industrials. In addition to that, BMO Global is 1.03 times more volatile than TSX Industrials Capped. It trades about 0.06 of its total potential returns per unit of risk. TSX Industrials Capped is currently generating about 0.06 per unit of volatility. If you would invest  35,521  in TSX Industrials Capped on January 25, 2024 and sell it today you would earn a total of  10,587  from holding TSX Industrials Capped or generate 29.8% return on investment over 90 days.

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

BMO Global Communications  vs.  TSX Industrials Capped

Pair Trading with BMO Global and TSX Industrials

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

The idea behind BMO Global Communications and TSX Industrials Capped 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.