Correlation Between East Japan and Nishi-Nippon Railroad

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

Diversification Opportunities for East Japan and Nishi-Nippon Railroad

-0.06

Correlation Coefficient

East Japan  Nishi-Nippon Railroad

Good diversification

The 3 months correlation between East and Nishi-Nippon is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and Nishi Nippon Railroad Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nishi Nippon Railroad 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 Nishi-Nippon Railroad. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nishi Nippon Railroad has no effect on the direction of East Japan i.e., East Japan and Nishi-Nippon Railroad go up and down completely randomly.

Pair Corralation between East Japan and Nishi-Nippon Railroad

Assuming the 90 days horizon East Japan Railway is expected to under-perform the Nishi-Nippon Railroad. But the stock apears to be less risky and, when comparing its historical volatility, East Japan Railway is 1.43 times less risky than Nishi-Nippon Railroad. The stock trades about -0.11 of its potential returns per unit of risk. The Nishi Nippon Railroad Co is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,400  in Nishi Nippon Railroad Co on October 9, 2024 and sell it today you would lose (20.00) from holding Nishi Nippon Railroad Co or give up 1.43% of portfolio value over 90 days.

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

East Japan Railway  vs.  Nishi Nippon Railroad Co

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.

Nishi Nippon Railroad

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nishi Nippon Railroad Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Nishi-Nippon Railroad 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 Nishi-Nippon Railroad

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

The idea behind East Japan Railway and Nishi Nippon Railroad Co 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.

Check out your portfolio center.

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 .