Correlation Between Source KBW and Source JPX

Can any of the company-specific risk be diversified away by investing in both Source KBW and Source JPX 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 Source KBW and Source JPX into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Source KBW NASDAQ and Source JPX Nikkei 400, you can compare the effects of market volatilities on Source KBW and Source JPX 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 Source KBW with a short position of Source JPX. Check out your portfolio center. Please also check ongoing floating volatility patterns of Source KBW and Source JPX.

Diversification Opportunities for Source KBW and Source JPX

0.42

Correlation Coefficient

Source KBW  Source JPX

Very weak diversification

The 3 months correlation between Source and Source is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Source KBW NASDAQ and Source JPX Nikkei 400 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source JPX Nikkei and Source KBW 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 Source KBW NASDAQ are associated (or correlated) with Source JPX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source JPX Nikkei has no effect on the direction of Source KBW i.e., Source KBW and Source JPX go up and down completely randomly.

Pair Corralation between Source KBW and Source JPX

Assuming the 90 days trading horizon Source KBW NASDAQ is expected to generate 1.56 times more return on investment than Source JPX. However, Source KBW is 1.56 times more volatile than Source JPX Nikkei 400. It trades about 0.2 of its potential returns per unit of risk. Source JPX Nikkei 400 is currently generating about 0.05 per unit of risk. If you would invest  4,931  in Source KBW NASDAQ on October 22, 2024 and sell it today you would earn a total of  830.00  from holding Source KBW NASDAQ or generate 16.83% return on investment over 90 days.

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

Source KBW NASDAQ  vs.  Source JPX Nikkei 400

Source KBW NASDAQ

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Source KBW NASDAQ are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady forward-looking signals, Source KBW exhibited solid returns over the last few months and may actually be approaching a breakup point.

Source JPX Nikkei

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Source JPX Nikkei 400 are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Source JPX is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Source KBW and Source JPX

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

The idea behind Source KBW NASDAQ and Source JPX Nikkei 400 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.