Correlation Between Japan Tobacco and Merit Medical

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

By analyzing existing cross correlation between Japan Tobacco ADR and Merit Medical Systems, you can compare the effects of market volatilities on Japan Tobacco and Merit Medical 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 Merit Medical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Japan Tobacco and Merit Medical.

Diversification Opportunities for Japan Tobacco and Merit Medical

-0.23

Correlation Coefficient

Japan Tobacco  Merit Medical

Very good diversification

The 3 months correlation between Japan and Merit is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco ADR and Merit Medical Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merit Medical Systems 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 ADR are associated (or correlated) with Merit Medical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merit Medical Systems has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and Merit Medical go up and down completely randomly.

Pair Corralation between Japan Tobacco and Merit Medical

Assuming the 90 days horizon Japan Tobacco is expected to generate 1.25 times less return on investment than Merit Medical. But when comparing it to its historical volatility, Japan Tobacco ADR is 1.42 times less risky than Merit Medical. It trades about 0.05 of its potential returns per unit of risk. Merit Medical Systems is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  9,761  in Merit Medical Systems on December 21, 2024 and sell it today you would earn a total of  367.00  from holding Merit Medical Systems or generate 3.76% return on investment over 90 days.

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

Japan Tobacco ADR  vs.  Merit Medical Systems

Japan Tobacco ADR

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Tobacco ADR are ranked lower than 4 (%) 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.

Merit Medical Systems

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Merit Medical Systems are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Merit Medical is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Japan Tobacco and Merit Medical

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

The idea behind Japan Tobacco ADR and Merit Medical Systems 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.