Correlation Between Imperial Brands and Japan Tobacco

Can any of the company-specific risk be diversified away by investing in both Imperial Brands 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 Imperial Brands and Japan Tobacco 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 Japan Tobacco ADR, you can compare the effects of market volatilities on Imperial Brands 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 Imperial Brands with a short position of Japan Tobacco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Imperial Brands and Japan Tobacco.

Diversification Opportunities for Imperial Brands and Japan Tobacco

0.41

Correlation Coefficient

Imperial Brands  Japan Tobacco

Very weak diversification

The 3 months correlation between Imperial and Japan is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Brands PLC and Japan Tobacco ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco ADR 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 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 ADR has no effect on the direction of Imperial Brands i.e., Imperial Brands and Japan Tobacco go up and down completely randomly.

Pair Corralation between Imperial Brands and Japan Tobacco

Assuming the 90 days horizon Imperial Brands PLC is expected to generate 1.04 times more return on investment than Japan Tobacco. However, Imperial Brands is 1.04 times more volatile than Japan Tobacco ADR. It trades about 0.23 of its potential returns per unit of risk. Japan Tobacco ADR is currently generating about 0.08 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	Weak
Accuracy	100.0%
Values	Daily Returns

Imperial Brands PLC  vs.  Japan Tobacco ADR

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.

Japan Tobacco ADR

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Tobacco ADR are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Japan Tobacco is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Imperial Brands and Japan Tobacco

The main advantage of trading using opposite Imperial Brands and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Imperial Brands 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 Imperial Brands PLC and Japan Tobacco ADR 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.