Correlation Between Japan Tobacco and Imperial Brands

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

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

Diversification Opportunities for Japan Tobacco and Imperial Brands

0.09

Correlation Coefficient

Japan Tobacco  Imperial Brands

Significant diversification

The 3 months correlation between Japan and Imperial is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco and Imperial Brands PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Imperial Brands PLC and Japan Tobacco 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 Japan Tobacco are associated (or correlated) with Imperial Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Imperial Brands PLC has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and Imperial Brands go up and down completely randomly.

Pair Corralation between Japan Tobacco and Imperial Brands

Assuming the 90 days horizon Japan Tobacco is expected to generate 6.16 times less return on investment than Imperial Brands. In addition to that, Japan Tobacco is 3.83 times more volatile than Imperial Brands PLC. It trades about 0.01 of its total potential returns per unit of risk. Imperial Brands PLC is currently generating about 0.23 per unit of volatility. 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	Insignificant
Accuracy	90.32%
Values	Daily Returns

Japan Tobacco  vs.  Imperial Brands PLC

Japan Tobacco

Risk-Adjusted Performance

Very Weak

Over the last 90 days Japan Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

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.

Pair Trading with Japan Tobacco and Imperial Brands

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

The idea behind Japan Tobacco and Imperial Brands PLC 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.