Correlation Between BMO SP and MegaShort

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

By analyzing existing cross correlation between BMO SP 500 and MegaShort 20 Year, you can compare the effects of market volatilities on BMO SP 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 SP with a short position of MegaShort. Check out your portfolio center. Please also check ongoing floating volatility patterns of BMO SP and MegaShort.

Diversification Opportunities for BMO SP and MegaShort

-0.17

Correlation Coefficient

BMO SP  MegaShort

Good diversification

The 3 months correlation between BMO and MegaShort is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding BMO SP 500 and MegaShort 20 Year in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MegaShort 20 Year and BMO SP 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 SP 500 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 20 Year has no effect on the direction of BMO SP i.e., BMO SP and MegaShort go up and down completely randomly.

Pair Corralation between BMO SP and MegaShort

Assuming the 90 days trading horizon BMO SP 500 is expected to generate 0.39 times more return on investment than MegaShort. However, BMO SP 500 is 2.58 times less risky than MegaShort. It trades about 0.24 of its potential returns per unit of risk. MegaShort 20 Year is currently generating about -0.01 per unit of risk. If you would invest  8,358  in BMO SP 500 on April 25, 2025 and sell it today you would earn a total of  1,098  from holding BMO SP 500 or generate 13.14% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	62.9%
Values	Daily Returns

BMO SP 500  vs.  MegaShort 20 Year

BMO SP 500

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BMO SP 500 are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, BMO SP displayed solid returns over the last few months and may actually be approaching a breakup point.

MegaShort 20 Year

Risk-Adjusted Performance

Very Weak

Over the last 90 days MegaShort 20 Year has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, MegaShort 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 SP and MegaShort

The main advantage of trading using opposite BMO SP and MegaShort positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BMO SP 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 SP 500 and MegaShort 20 Year 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.