Correlation Between Japan Tobacco and Volkswagen

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

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

Diversification Opportunities for Japan Tobacco and Volkswagen

-0.14

Correlation Coefficient

Japan Tobacco  Volkswagen

Good diversification

The 3 months correlation between Japan and Volkswagen is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco and Volkswagen AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG 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 Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and Volkswagen go up and down completely randomly.

Pair Corralation between Japan Tobacco and Volkswagen

Assuming the 90 days horizon Japan Tobacco is expected to under-perform the Volkswagen. But the stock apears to be less risky and, when comparing its historical volatility, Japan Tobacco is 1.26 times less risky than Volkswagen. The stock trades about -0.05 of its potential returns per unit of risk. The Volkswagen AG is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  8,995  in Volkswagen AG on October 7, 2024 and sell it today you would lose (110.00) from holding Volkswagen AG or give up 1.22% of portfolio value over 90 days.

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

Japan Tobacco  vs.  Volkswagen AG

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 latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Volkswagen AG

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volkswagen AG has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Japan Tobacco and Volkswagen

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

The idea behind Japan Tobacco and Volkswagen AG 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.