Correlation Between Japan Steel and British American

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

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

Diversification Opportunities for Japan Steel and British American

0.83

Correlation Coefficient

Japan Steel  British American

Very poor diversification

The 3 months correlation between Japan and British is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding The Japan Steel 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 Japan Steel 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 The Japan Steel are associated (or correlated) with British American. 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 Japan Steel i.e., Japan Steel and British American go up and down completely randomly.

Pair Corralation between Japan Steel and British American

Assuming the 90 days horizon The Japan Steel is expected to generate 2.01 times more return on investment than British American. However, Japan Steel is 2.01 times more volatile than British American Tobacco. It trades about 0.06 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.03 per unit of risk. If you would invest  1,840  in The Japan Steel on October 4, 2024 and sell it today you would earn a total of  1,640  from holding The Japan Steel or generate 89.13% return on investment over 90 days.

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

The Japan Steel  vs.  British American Tobacco

Japan Steel

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Japan Steel are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Japan Steel is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

British American Tobacco

Risk-Adjusted Performance

12 of 100

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 nearly fragile basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Japan Steel and British American

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

The idea behind The Japan Steel 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 Transaction History module to view history of all your transactions and understand their impact on performance.