Correlation Between Sea and Japan Tobacco

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

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

Diversification Opportunities for Sea and Japan Tobacco

-0.45

Correlation Coefficient

Sea  Japan Tobacco

Very good diversification

The 3 months correlation between Sea and Japan is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Sea and Japan Tobacco ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Tobacco ADR and Sea 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 Sea 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 ADR has no effect on the direction of Sea i.e., Sea and Japan Tobacco go up and down completely randomly.

Pair Corralation between Sea and Japan Tobacco

Allowing for the 90-day total investment horizon Sea is expected to generate 2.37 times more return on investment than Japan Tobacco. However, Sea is 2.37 times more volatile than Japan Tobacco ADR. It trades about -0.11 of its potential returns per unit of risk. Japan Tobacco ADR is currently generating about -0.3 per unit of risk. If you would invest  11,400  in Sea on September 24, 2024 and sell it today you would lose (461.00) from holding Sea or give up 4.04% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Sea  vs.  Japan Tobacco ADR

Sea

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sea are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Sea exhibited solid returns over the last few months and may actually be approaching a breakup point.

Japan Tobacco ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Japan Tobacco ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Sea and Japan Tobacco

The main advantage of trading using opposite Sea and Japan Tobacco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sea 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 Sea and Japan Tobacco ADR 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.