Correlation Between East Japan and Electronic Arts

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

Diversification Opportunities for East Japan and Electronic Arts

-0.19

Correlation Coefficient

East Japan  Electronic Arts

Good diversification

The 3 months correlation between East and Electronic is -0.19. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and Electronic Arts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electronic Arts 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 Electronic Arts. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electronic Arts has no effect on the direction of East Japan i.e., East Japan and Electronic Arts go up and down completely randomly.

Pair Corralation between East Japan and Electronic Arts

Assuming the 90 days horizon East Japan Railway is expected to generate 0.44 times more return on investment than Electronic Arts. However, East Japan Railway is 2.28 times less risky than Electronic Arts. It trades about 0.12 of its potential returns per unit of risk. Electronic Arts is currently generating about -0.01 per unit of risk. If you would invest  1,677  in East Japan Railway on December 22, 2024 and sell it today you would earn a total of  164.00  from holding East Japan Railway or generate 9.78% return on investment over 90 days.

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

East Japan Railway  vs.  Electronic Arts

East Japan Railway

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East Japan Railway are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, East Japan may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Electronic Arts

Risk-Adjusted Performance

Very Weak

Over the last 90 days Electronic Arts has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Electronic Arts is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with East Japan and Electronic Arts

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

The idea behind East Japan Railway and Electronic Arts 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.