Correlation Between Imperial Brands and British Amer

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

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

Diversification Opportunities for Imperial Brands and British Amer

0.86

Correlation Coefficient

Imperial Brands  British Amer

Very poor diversification

The 3 months correlation between Imperial and British is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Brands PLC and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco and Imperial Brands 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 Imperial Brands PLC are associated (or correlated) with British Amer. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of Imperial Brands i.e., Imperial Brands and British Amer go up and down completely randomly.

Pair Corralation between Imperial Brands and British Amer

Assuming the 90 days horizon Imperial Brands PLC is expected to generate 0.73 times more return on investment than British Amer. However, Imperial Brands PLC is 1.37 times less risky than British Amer. It trades about 0.23 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.15 per unit of risk. If you would invest  3,149  in Imperial Brands PLC on December 30, 2024 and sell it today you would earn a total of  509.00  from holding Imperial Brands PLC or generate 16.16% return on investment over 90 days.

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

Imperial Brands PLC  vs.  British American Tobacco

Imperial Brands PLC

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Brands PLC are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile fundamental drivers, Imperial Brands showed solid returns over the last few months and may actually be approaching a breakup point.

British American Tobacco

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating basic indicators, British Amer demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Imperial Brands and British Amer

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

The idea behind Imperial Brands PLC and British American 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.