Correlation Between Pentair Plc and Japan Tobacco

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

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

Diversification Opportunities for Pentair Plc and Japan Tobacco

0.02

Correlation Coefficient

Pentair Plc  Japan Tobacco

Significant diversification

The 3 months correlation between Pentair and Japan is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Pentair plc and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and Pentair Plc 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 Pentair plc are associated (or correlated) with Japan Tobacco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Tobacco has no effect on the direction of Pentair Plc i.e., Pentair Plc and Japan Tobacco go up and down completely randomly.

Pair Corralation between Pentair Plc and Japan Tobacco

Assuming the 90 days horizon Pentair plc is expected to generate 1.08 times more return on investment than Japan Tobacco. However, Pentair Plc is 1.08 times more volatile than Japan Tobacco. It trades about 0.12 of its potential returns per unit of risk. Japan Tobacco is currently generating about 0.03 per unit of risk. If you would invest  6,401  in Pentair plc on September 13, 2024 and sell it today you would earn a total of  3,819  from holding Pentair plc or generate 59.66% return on investment over 90 days.

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

Pentair plc  vs.  Japan Tobacco

Pentair plc

Risk-Adjusted Performance

24 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Pentair plc are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Pentair Plc reported solid returns over the last few months and may actually be approaching a breakup point.

Japan Tobacco

Risk-Adjusted Performance

0 of 100

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.

Pair Trading with Pentair Plc and Japan Tobacco

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

The idea behind Pentair plc and Japan 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.