Correlation Between Imperial Brands and Japan Tobacco

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

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

Diversification Opportunities for Imperial Brands and Japan Tobacco

0.13

Correlation Coefficient

Imperial Brands  Japan Tobacco

Average diversification

The 3 months correlation between Imperial and Japan is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Brands PLC and Japan Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco and Imperial Brands 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 Imperial Brands 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 Imperial Brands i.e., Imperial Brands and Japan Tobacco go up and down completely randomly.

Pair Corralation between Imperial Brands and Japan Tobacco

Assuming the 90 days trading horizon Imperial Brands PLC is expected to generate 0.91 times more return on investment than Japan Tobacco. However, Imperial Brands PLC is 1.1 times less risky than Japan Tobacco. It trades about 0.15 of its potential returns per unit of risk. Japan Tobacco is currently generating about -0.33 per unit of risk. If you would invest  3,014  in Imperial Brands PLC on September 25, 2024 and sell it today you would earn a total of  74.00  from holding Imperial Brands PLC or generate 2.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Imperial Brands PLC  vs.  Japan Tobacco

Imperial Brands PLC

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Brands PLC are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental drivers, Imperial Brands unveiled solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Imperial Brands and Japan Tobacco

The main advantage of trading using opposite Imperial Brands and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Imperial Brands 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 Imperial Brands 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.