Correlation Between East Japan and China Railway

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

Diversification Opportunities for East Japan and China Railway

-0.63

Correlation Coefficient

East Japan  China Railway

Excellent diversification

The 3 months correlation between East and China is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and China Railway Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Signal 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 China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Signal has no effect on the direction of East Japan i.e., East Japan and China Railway go up and down completely randomly.

Pair Corralation between East Japan and China Railway

Assuming the 90 days horizon East Japan is expected to generate 74.7 times less return on investment than China Railway. But when comparing it to its historical volatility, East Japan Railway is 4.27 times less risky than China Railway. It trades about 0.0 of its potential returns per unit of risk. China Railway Signal is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  14.00  in China Railway Signal on October 22, 2024 and sell it today you would earn a total of  24.00  from holding China Railway Signal or generate 171.43% return on investment over 90 days.

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

East Japan Railway  vs.  China Railway Signal

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 latest weak performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

China Railway Signal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Signal are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Railway reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with East Japan and China Railway

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

The idea behind East Japan Railway and China Railway Signal 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.