Correlation Between Central Japan and East Japan

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

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

Diversification Opportunities for Central Japan and East Japan

0.54

Correlation Coefficient

Central Japan  East Japan

Very weak diversification

The 3 months correlation between Central and East is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Central Japan Railway and East Japan Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on East Japan Railway and Central 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 Central Japan Railway are associated (or correlated) with East Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of East Japan Railway has no effect on the direction of Central Japan i.e., Central Japan and East Japan go up and down completely randomly.

Pair Corralation between Central Japan and East Japan

Assuming the 90 days horizon Central Japan Railway is expected to under-perform the East Japan. But the pink sheet apears to be less risky and, when comparing its historical volatility, Central Japan Railway is 1.3 times less risky than East Japan. The pink sheet trades about -0.04 of its potential returns per unit of risk. The East Japan Railway is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  876.00  in East Japan Railway on September 1, 2024 and sell it today you would earn a total of  92.00  from holding East Japan Railway or generate 10.5% return on investment over 90 days.

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

Central Japan Railway  vs.  East Japan Railway

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 latest weak 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.

East Japan Railway

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in East Japan Railway are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, East Japan is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Central Japan and East Japan

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

The idea behind Central Japan Railway and East 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.