Correlation Between Japan Tobacco and Tesco PLC

Can any of the company-specific risk be diversified away by investing in both Japan Tobacco and Tesco PLC 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 Tesco PLC 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 Tesco PLC, you can compare the effects of market volatilities on Japan Tobacco and Tesco PLC 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 Tesco PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Japan Tobacco and Tesco PLC.

Diversification Opportunities for Japan Tobacco and Tesco PLC

-0.6

Correlation Coefficient

Japan Tobacco  Tesco PLC

Excellent diversification

The 3 months correlation between Japan and Tesco is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco ADR and Tesco PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tesco 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 ADR are associated (or correlated) with Tesco PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tesco PLC has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and Tesco PLC go up and down completely randomly.

Pair Corralation between Japan Tobacco and Tesco PLC

Assuming the 90 days horizon Japan Tobacco is expected to generate 1.63 times less return on investment than Tesco PLC. But when comparing it to its historical volatility, Japan Tobacco ADR is 2.39 times less risky than Tesco PLC. It trades about 0.06 of its potential returns per unit of risk. Tesco PLC is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  322.00  in Tesco PLC on January 13, 2025 and sell it today you would earn a total of  108.00  from holding Tesco PLC or generate 33.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	85.69%
Values	Daily Returns

Japan Tobacco ADR  vs.  Tesco PLC

Japan Tobacco ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Tobacco ADR are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Japan Tobacco showed solid returns over the last few months and may actually be approaching a breakup point.

Tesco PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tesco PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, Tesco PLC is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Japan Tobacco and Tesco PLC

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

The idea behind Japan Tobacco ADR and Tesco 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.