Correlation Between Westinghouse Air and East Japan

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

By analyzing existing cross correlation between Westinghouse Air Brake and East Japan Railway, you can compare the effects of market volatilities on Westinghouse Air and East Japan 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 Westinghouse Air with a short position of East Japan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Westinghouse Air and East Japan.

Diversification Opportunities for Westinghouse Air and East Japan

-0.75

Correlation Coefficient

Westinghouse Air  East Japan

Pay attention - limited upside

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

Pair Corralation between Westinghouse Air and East Japan

Considering the 90-day investment horizon Westinghouse Air Brake is expected to under-perform the East Japan. In addition to that, Westinghouse Air is 1.5 times more volatile than East Japan Railway. It trades about -0.03 of its total potential returns per unit of risk. East Japan Railway is currently generating about 0.14 per unit of volatility. If you would invest  883.00  in East Japan Railway on December 30, 2024 and sell it today you would earn a total of  96.00  from holding East Japan Railway or generate 10.87% return on investment over 90 days.

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

Westinghouse Air Brake  vs.  East Japan Railway

Westinghouse Air Brake

Risk-Adjusted Performance

Very Weak

Over the last 90 days Westinghouse Air Brake has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Westinghouse Air is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

East Japan Railway

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East Japan Railway are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, East Japan may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Westinghouse Air and East Japan

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

The idea behind Westinghouse Air Brake and East Japan Railway 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.