Correlation Between Wesfarmers and Japan Exchange

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

By analyzing existing cross correlation between Wesfarmers Ltd ADR and Japan Exchange Group, you can compare the effects of market volatilities on Wesfarmers and Japan Exchange 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 Wesfarmers with a short position of Japan Exchange. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wesfarmers and Japan Exchange.

Diversification Opportunities for Wesfarmers and Japan Exchange

0.64

Correlation Coefficient

Wesfarmers  Japan Exchange

Poor diversification

The 3 months correlation between Wesfarmers and Japan is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Wesfarmers Ltd ADR and Japan Exchange Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Exchange Group and Wesfarmers 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 Wesfarmers Ltd ADR are associated (or correlated) with Japan Exchange. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Exchange Group has no effect on the direction of Wesfarmers i.e., Wesfarmers and Japan Exchange go up and down completely randomly.

Pair Corralation between Wesfarmers and Japan Exchange

Assuming the 90 days horizon Wesfarmers Ltd ADR is expected to generate 1.05 times more return on investment than Japan Exchange. However, Wesfarmers is 1.05 times more volatile than Japan Exchange Group. It trades about 0.01 of its potential returns per unit of risk. Japan Exchange Group is currently generating about -0.07 per unit of risk. If you would invest  2,258  in Wesfarmers Ltd ADR on October 25, 2024 and sell it today you would lose (5.00) from holding Wesfarmers Ltd ADR or give up 0.22% of portfolio value over 90 days.

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

Wesfarmers Ltd ADR  vs.  Japan Exchange Group

Wesfarmers ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wesfarmers Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Wesfarmers is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Japan Exchange Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Japan Exchange Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Wesfarmers and Japan Exchange

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

The idea behind Wesfarmers Ltd ADR and Japan Exchange Group 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 Global Correlations module to find global opportunities by holding instruments from different markets.