Correlation Between BlackRock and Japan Tobacco

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

By analyzing existing cross correlation between BlackRock and Japan Tobacco, you can compare the effects of market volatilities on BlackRock and Japan Tobacco 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 BlackRock with a short position of Japan Tobacco. Check out your portfolio center. Please also check ongoing floating volatility patterns of BlackRock and Japan Tobacco.

Diversification Opportunities for BlackRock and Japan Tobacco

0.01

Correlation Coefficient

BlackRock  Japan Tobacco

Significant diversification

The 3 months correlation between BlackRock and Japan is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding BlackRock and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and BlackRock 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 BlackRock are associated (or correlated) with Japan Tobacco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Tobacco has no effect on the direction of BlackRock i.e., BlackRock and Japan Tobacco go up and down completely randomly.

Pair Corralation between BlackRock and Japan Tobacco

Considering the 90-day investment horizon BlackRock is expected to under-perform the Japan Tobacco. But the stock apears to be less risky and, when comparing its historical volatility, BlackRock is 2.53 times less risky than Japan Tobacco. The stock trades about -0.04 of its potential returns per unit of risk. The Japan Tobacco is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,850  in Japan Tobacco on December 29, 2024 and sell it today you would lose (72.00) from holding Japan Tobacco or give up 2.53% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	90.16%
Values	Daily Returns

BlackRock  vs.  Japan Tobacco

BlackRock

Risk-Adjusted Performance

Very Weak

Over the last 90 days BlackRock has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent essential indicators, BlackRock is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Japan Tobacco

Risk-Adjusted Performance

Very Weak

Over the last 90 days Japan Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Japan Tobacco is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with BlackRock and Japan Tobacco

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

The idea behind BlackRock and Japan Tobacco 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.