Correlation Between East Japan and Freightcar America

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

Diversification Opportunities for East Japan and Freightcar America

0.23

Correlation Coefficient

East Japan  Freightcar America

Modest diversification

The 3 months correlation between East and Freightcar is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and Freightcar America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Freightcar America 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 Freightcar America. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Freightcar America has no effect on the direction of East Japan i.e., East Japan and Freightcar America go up and down completely randomly.

Pair Corralation between East Japan and Freightcar America

Assuming the 90 days horizon East Japan Railway is expected to under-perform the Freightcar America. But the pink sheet apears to be less risky and, when comparing its historical volatility, East Japan Railway is 5.57 times less risky than Freightcar America. The pink sheet trades about -0.02 of its potential returns per unit of risk. The Freightcar America is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  809.00  in Freightcar America on August 31, 2024 and sell it today you would earn a total of  174.00  from holding Freightcar America or generate 21.51% return on investment over 90 days.

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

East Japan Railway  vs.  Freightcar America

East Japan Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days East Japan Railway has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Freightcar America

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Freightcar America are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite weak forward indicators, Freightcar America disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with East Japan and Freightcar America

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

The idea behind East Japan Railway and Freightcar America 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.