Correlation Between Japan Tobacco and Northrop Grumman

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

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

Diversification Opportunities for Japan Tobacco and Northrop Grumman

-0.37

Correlation Coefficient

Japan Tobacco  Northrop Grumman

Very good diversification

The 3 months correlation between Japan and Northrop is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Japan Tobacco and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman 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 are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of Japan Tobacco i.e., Japan Tobacco and Northrop Grumman go up and down completely randomly.

Pair Corralation between Japan Tobacco and Northrop Grumman

Assuming the 90 days horizon Japan Tobacco is expected to under-perform the Northrop Grumman. But the stock apears to be less risky and, when comparing its historical volatility, Japan Tobacco is 1.16 times less risky than Northrop Grumman. The stock trades about -0.08 of its potential returns per unit of risk. The Northrop Grumman is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  41,411  in Northrop Grumman on April 23, 2025 and sell it today you would earn a total of  3,649  from holding Northrop Grumman or generate 8.81% return on investment over 90 days.

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

Japan Tobacco  vs.  Northrop Grumman

Japan Tobacco

Risk-Adjusted Performance

Very Weak

Over the last 90 days Japan Tobacco 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.

Northrop Grumman

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northrop Grumman are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Northrop Grumman may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Japan Tobacco and Northrop Grumman

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

The idea behind Japan Tobacco and Northrop Grumman 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.