Correlation Between East Japan and MTRLimited

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

Diversification Opportunities for East Japan and MTRLimited

0.17

Correlation Coefficient

East Japan  MTRLimited

Average diversification

The 3 months correlation between East and MTRLimited is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and MTR Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTR Limited 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 MTRLimited. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTR Limited has no effect on the direction of East Japan i.e., East Japan and MTRLimited go up and down completely randomly.

Pair Corralation between East Japan and MTRLimited

Assuming the 90 days horizon East Japan is expected to generate 9.61 times less return on investment than MTRLimited. But when comparing it to its historical volatility, East Japan Railway is 1.49 times less risky than MTRLimited. It trades about 0.01 of its potential returns per unit of risk. MTR Limited is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  223.00  in MTR Limited on October 5, 2024 and sell it today you would earn a total of  105.00  from holding MTR Limited or generate 47.09% return on investment over 90 days.

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

East Japan Railway  vs.  MTR Limited

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

MTR Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with East Japan and MTRLimited

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

The idea behind East Japan Railway and MTR Limited 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.