Correlation Between Imperial Brands and Scandinavian Tobacco

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

Diversification Opportunities for Imperial Brands and Scandinavian Tobacco

-0.72

Correlation Coefficient

Imperial Brands  Scandinavian Tobacco

Pay attention - limited upside

The 3 months correlation between Imperial and Scandinavian is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Brands PLC and Scandinavian Tobacco Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Scandinavian 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 Scandinavian Tobacco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Scandinavian Tobacco has no effect on the direction of Imperial Brands i.e., Imperial Brands and Scandinavian Tobacco go up and down completely randomly.

Pair Corralation between Imperial Brands and Scandinavian Tobacco

Assuming the 90 days horizon Imperial Brands PLC is expected to generate 0.83 times more return on investment than Scandinavian Tobacco. However, Imperial Brands PLC is 1.21 times less risky than Scandinavian Tobacco. It trades about 0.24 of its potential returns per unit of risk. Scandinavian Tobacco Group is currently generating about -0.09 per unit of risk. If you would invest  2,537  in Imperial Brands PLC on September 3, 2024 and sell it today you would earn a total of  546.00  from holding Imperial Brands PLC or generate 21.52% return on investment over 90 days.

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

Imperial Brands PLC  vs.  Scandinavian Tobacco Group

Imperial Brands PLC

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Brands PLC are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Imperial Brands reported solid returns over the last few months and may actually be approaching a breakup point.

Scandinavian Tobacco

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Scandinavian Tobacco Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile 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.

Pair Trading with Imperial Brands and Scandinavian Tobacco

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

The idea behind Imperial Brands PLC and Scandinavian Tobacco Group 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.