Correlation Between Japan Tobacco and AIB Group

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

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

Diversification Opportunities for Japan Tobacco and AIB Group

-0.29

Correlation Coefficient

Japan Tobacco  AIB Group

Very good diversification

The 3 months correlation between Japan and AIB is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco and AIB Group plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AIB Group 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 AIB Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AIB Group plc has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and AIB Group go up and down completely randomly.

Pair Corralation between Japan Tobacco and AIB Group

Assuming the 90 days horizon Japan Tobacco is expected to generate 2.11 times less return on investment than AIB Group. But when comparing it to its historical volatility, Japan Tobacco is 1.87 times less risky than AIB Group. It trades about 0.04 of its potential returns per unit of risk. AIB Group plc is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  354.00  in AIB Group plc on October 23, 2024 and sell it today you would earn a total of  196.00  from holding AIB Group plc or generate 55.37% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Japan Tobacco  vs.  AIB Group plc

Japan Tobacco

Risk-Adjusted Performance

0 of 100

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.

AIB Group plc

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AIB Group plc are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, AIB Group reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Japan Tobacco and AIB Group

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

The idea behind Japan Tobacco and AIB Group 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..