Correlation Between Central Japan and Nishi Nippon

Can any of the company-specific risk be diversified away by investing in both Central Japan and Nishi Nippon 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 Nishi Nippon 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 Nishi Nippon Railroad Co, you can compare the effects of market volatilities on Central Japan and Nishi Nippon 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 Nishi Nippon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Central Japan and Nishi Nippon.

Diversification Opportunities for Central Japan and Nishi Nippon

0.71

Correlation Coefficient

Central Japan  Nishi Nippon

Poor diversification

The 3 months correlation between Central and Nishi is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Central Japan Railway and Nishi Nippon Railroad Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nishi Nippon Railroad 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 Nishi Nippon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nishi Nippon Railroad has no effect on the direction of Central Japan i.e., Central Japan and Nishi Nippon go up and down completely randomly.

Pair Corralation between Central Japan and Nishi Nippon

Assuming the 90 days horizon Central Japan Railway is expected to under-perform the Nishi Nippon. But the stock apears to be less risky and, when comparing its historical volatility, Central Japan Railway is 1.02 times less risky than Nishi Nippon. The stock trades about -0.03 of its potential returns per unit of risk. The Nishi Nippon Railroad Co is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  1,440  in Nishi Nippon Railroad Co on September 1, 2024 and sell it today you would lose (30.00) from holding Nishi Nippon Railroad Co or give up 2.08% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.48%
Values	Daily Returns

Central Japan Railway  vs.  Nishi Nippon Railroad Co

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. Despite nearly stable basic indicators, Central Japan is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Nishi Nippon Railroad

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nishi Nippon Railroad Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Nishi Nippon is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Central Japan and Nishi Nippon

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

The idea behind Central Japan Railway and Nishi Nippon Railroad Co 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.