Correlation Between Central Japan and Canadian Pacific

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

Diversification Opportunities for Central Japan and Canadian Pacific

0.63

Correlation Coefficient

Central Japan  Canadian Pacific

Poor diversification

The 3 months correlation between Central and Canadian is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Central Japan Railway and Canadian Pacific Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Pacific 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 Canadian Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Pacific Railway has no effect on the direction of Central Japan i.e., Central Japan and Canadian Pacific go up and down completely randomly.

Pair Corralation between Central Japan and Canadian Pacific

Assuming the 90 days horizon Central Japan Railway is expected to under-perform the Canadian Pacific. But the pink sheet apears to be less risky and, when comparing its historical volatility, Central Japan Railway is 1.48 times less risky than Canadian Pacific. The pink sheet trades about -0.12 of its potential returns per unit of risk. The Canadian Pacific Railway is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  7,325  in Canadian Pacific Railway on October 25, 2024 and sell it today you would earn a total of  683.00  from holding Canadian Pacific Railway or generate 9.32% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	94.74%
Values	Daily Returns

Central Japan Railway  vs.  Canadian Pacific 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.

Canadian Pacific Railway

Risk-Adjusted Performance

4 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Canadian Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Central Japan and Canadian Pacific

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

The idea behind Central Japan Railway and Canadian Pacific 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .