Correlation Between Kubota and Hitachi Construction

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

By analyzing existing cross correlation between Kubota and Hitachi Construction Machinery, you can compare the effects of market volatilities on Kubota and Hitachi Construction 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 Kubota with a short position of Hitachi Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Kubota and Hitachi Construction.

Diversification Opportunities for Kubota and Hitachi Construction

0.75

Correlation Coefficient

Kubota  Hitachi Construction

Poor diversification

The 3 months correlation between Kubota and Hitachi is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Kubota and Hitachi Construction Machinery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hitachi Construction and Kubota 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 Kubota are associated (or correlated) with Hitachi Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hitachi Construction has no effect on the direction of Kubota i.e., Kubota and Hitachi Construction go up and down completely randomly.

Pair Corralation between Kubota and Hitachi Construction

Assuming the 90 days trading horizon Kubota is expected to under-perform the Hitachi Construction. But the stock apears to be less risky and, when comparing its historical volatility, Kubota is 1.29 times less risky than Hitachi Construction. The stock trades about -0.08 of its potential returns per unit of risk. The Hitachi Construction Machinery is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  2,120  in Hitachi Construction Machinery on September 4, 2024 and sell it today you would lose (20.00) from holding Hitachi Construction Machinery or give up 0.94% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Kubota  vs.  Hitachi Construction Machinery

Kubota

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Kubota has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile 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.

Hitachi Construction

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Kubota and Hitachi Construction

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

The idea behind Kubota and Hitachi Construction Machinery 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.