Correlation Between Central Japan and China Railway

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

Diversification Opportunities for Central Japan and China Railway

-0.71

Correlation Coefficient

Central Japan  China Railway

Pay attention - limited upside

The 3 months correlation between Central and China is -0.71. Overlapping area represents the amount of risk that can be diversified away by holding Central 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 Central 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 Central 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 Central Japan i.e., Central Japan and China Railway go up and down completely randomly.

Pair Corralation between Central Japan and China Railway

Assuming the 90 days horizon Central Japan Railway is expected to under-perform the China Railway. But the stock apears to be less risky and, when comparing its historical volatility, Central Japan Railway is 1.94 times less risky than China Railway. The stock trades about -0.14 of its potential returns per unit of risk. The China Railway Signal is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  34.00  in China Railway Signal on October 22, 2024 and sell it today you would earn a total of  4.00  from holding China Railway Signal or generate 11.76% return on investment over 90 days.

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

Central Japan Railway  vs.  China Railway Signal

Central Japan Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Central 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 Central Japan and China Railway

The main advantage of trading using opposite Central Japan and China Railway positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Central 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 Central 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.