Correlation Between China Eastern and Japan Tobacco

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

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

Diversification Opportunities for China Eastern and Japan Tobacco

-0.03

Correlation Coefficient

China Eastern  Japan Tobacco

Good diversification

The 3 months correlation between China and Japan is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding China Eastern Airlines and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and China Eastern 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 China Eastern Airlines 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 China Eastern i.e., China Eastern and Japan Tobacco go up and down completely randomly.

Pair Corralation between China Eastern and Japan Tobacco

Assuming the 90 days trading horizon China Eastern is expected to generate 2.29 times less return on investment than Japan Tobacco. In addition to that, China Eastern is 2.52 times more volatile than Japan Tobacco. It trades about 0.01 of its total potential returns per unit of risk. Japan Tobacco is currently generating about 0.04 per unit of volatility. If you would invest  1,850  in Japan Tobacco on October 11, 2024 and sell it today you would earn a total of  572.00  from holding Japan Tobacco or generate 30.92% return on investment over 90 days.

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

China Eastern Airlines  vs.  Japan Tobacco

China Eastern Airlines

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Eastern Airlines are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Eastern reported solid returns over the last few months and may actually be approaching a breakup point.

Japan Tobacco

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Japan Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with China Eastern and Japan Tobacco

The main advantage of trading using opposite China Eastern and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Eastern 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 China Eastern Airlines 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.

Check out your portfolio center.

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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.