Correlation Between East Japan and Central Japan

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

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

Diversification Opportunities for East Japan and Central Japan

0.03

Correlation Coefficient

East Japan  Central Japan

Significant diversification

The 3 months correlation between East and Central is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and Central Japan Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Central Japan Railway and East Japan 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 East Japan Railway are associated (or correlated) with Central Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Central Japan Railway has no effect on the direction of East Japan i.e., East Japan and Central Japan go up and down completely randomly.

Pair Corralation between East Japan and Central Japan

Assuming the 90 days horizon East Japan Railway is expected to generate 39.33 times more return on investment than Central Japan. However, East Japan is 39.33 times more volatile than Central Japan Railway. It trades about 0.15 of its potential returns per unit of risk. Central Japan Railway is currently generating about -0.03 per unit of risk. If you would invest  5,746  in East Japan Railway on January 24, 2024 and sell it today you would lose (3,968) from holding East Japan Railway or give up 69.06% of portfolio value over 90 days.

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

East Japan Railway  vs.  Central Japan Railway

East Japan Railway

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in East Japan Railway are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, East Japan reported solid returns over the last few months and may actually be approaching a breakup point.

Central Japan Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Central Japan Railway has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Central Japan is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with East Japan and Central Japan

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

The idea behind East Japan Railway and Central Japan Railway 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.