Correlation Between International Business and Japan Tobacco

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

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

Diversification Opportunities for International Business and Japan Tobacco

0.44

Correlation Coefficient

International Business  Japan Tobacco

Very weak diversification

The 3 months correlation between International and Japan is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and International Business 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 International Business Machines 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 International Business i.e., International Business and Japan Tobacco go up and down completely randomly.

Pair Corralation between International Business and Japan Tobacco

Assuming the 90 days horizon International Business Machines is expected to generate 0.85 times more return on investment than Japan Tobacco. However, International Business Machines is 1.17 times less risky than Japan Tobacco. It trades about 0.09 of its potential returns per unit of risk. Japan Tobacco is currently generating about 0.04 per unit of risk. If you would invest  11,910  in International Business Machines on October 11, 2024 and sell it today you would earn a total of  9,630  from holding International Business Machines or generate 80.86% return on investment over 90 days.

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

International Business Machine  vs.  Japan Tobacco

International Business

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in International Business Machines are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, International Business is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

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 International Business and Japan Tobacco

The main advantage of trading using opposite International Business and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Business 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 International Business Machines 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.