Correlation Between Deere and Japan Tobacco

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

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

Diversification Opportunities for Deere and Japan Tobacco

-0.36

Correlation Coefficient

Deere  Japan Tobacco

Very good diversification

The 3 months correlation between Deere and Japan is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Deere Company and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and Deere 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 Deere Company 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 Deere i.e., Deere and Japan Tobacco go up and down completely randomly.

Pair Corralation between Deere and Japan Tobacco

Assuming the 90 days horizon Deere Company is expected to generate 1.32 times more return on investment than Japan Tobacco. However, Deere is 1.32 times more volatile than Japan Tobacco. It trades about 0.06 of its potential returns per unit of risk. Japan Tobacco is currently generating about 0.03 per unit of risk. If you would invest  41,371  in Deere Company on December 27, 2024 and sell it today you would earn a total of  2,899  from holding Deere Company or generate 7.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

Deere Company  vs.  Japan Tobacco

Deere Company

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Deere Company are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Deere may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Japan Tobacco

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Tobacco are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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 Deere and Japan Tobacco

The main advantage of trading using opposite Deere and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Deere 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 Deere Company 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.