Correlation Between Daiwa House and Central Japan

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

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

Diversification Opportunities for Daiwa House and Central Japan

0.07

Correlation Coefficient

Daiwa House  Central Japan

Significant diversification

The 3 months correlation between Daiwa and Central is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Daiwa House Industry 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 Daiwa House 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 Daiwa House Industry 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 Daiwa House i.e., Daiwa House and Central Japan go up and down completely randomly.

Pair Corralation between Daiwa House and Central Japan

Assuming the 90 days horizon Daiwa House Industry is expected to generate 0.93 times more return on investment than Central Japan. However, Daiwa House Industry is 1.08 times less risky than Central Japan. It trades about -0.01 of its potential returns per unit of risk. Central Japan Railway is currently generating about -0.26 per unit of risk. If you would invest  3,108  in Daiwa House Industry on October 1, 2024 and sell it today you would lose (32.00) from holding Daiwa House Industry or give up 1.03% of portfolio value over 90 days.

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

Daiwa House Industry  vs.  Central Japan Railway

Daiwa House Industry

Risk-Adjusted Performance

0 of 100

Very Weak

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

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 weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Daiwa House and Central Japan

The main advantage of trading using opposite Daiwa House and Central Japan positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Daiwa House 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 Daiwa House Industry 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.