Correlation Between BMO Canadian and MegaShort

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

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

Diversification Opportunities for BMO Canadian and MegaShort

0.21

Correlation Coefficient

BMO Canadian  MegaShort

Modest diversification

The 3 months correlation between BMO and MegaShort is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding BMO Canadian Bank and MegaShort SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MegaShort SP 500 and BMO Canadian 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 Canadian Bank are associated (or correlated) with MegaShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MegaShort SP 500 has no effect on the direction of BMO Canadian i.e., BMO Canadian and MegaShort go up and down completely randomly.

Pair Corralation between BMO Canadian and MegaShort

Assuming the 90 days trading horizon BMO Canadian Bank is expected to generate 0.06 times more return on investment than MegaShort. However, BMO Canadian Bank is 16.01 times less risky than MegaShort. It trades about 0.27 of its potential returns per unit of risk. MegaShort SP 500 is currently generating about -0.28 per unit of risk. If you would invest  2,982  in BMO Canadian Bank on April 21, 2025 and sell it today you would earn a total of  62.00  from holding BMO Canadian Bank or generate 2.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	64.06%
Values	Daily Returns

BMO Canadian Bank  vs.  MegaShort SP 500

BMO Canadian Bank

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO Canadian Bank are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy forward indicators, BMO Canadian is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

MegaShort SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days MegaShort SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Etf's basic indicators remain very healthy which may send shares a bit higher in August 2025. The recent disarray may also be a sign of long period up-swing for the ETF investors.

Pair Trading with BMO Canadian and MegaShort

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

The idea behind BMO Canadian Bank and MegaShort 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.