Correlation Between West Japan and Central Japan

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

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

Diversification Opportunities for West Japan and Central Japan

0.93

Correlation Coefficient

West Japan  Central Japan

Almost no diversification

The 3 months correlation between West and Central is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding West Japan Railway and Central Japan Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Central Japan Railway and West 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 West Japan Railway are associated (or correlated) with Central Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Central Japan Railway has no effect on the direction of West Japan i.e., West Japan and Central Japan go up and down completely randomly.

Pair Corralation between West Japan and Central Japan

Assuming the 90 days horizon West Japan Railway is expected to generate 0.94 times more return on investment than Central Japan. However, West Japan Railway is 1.06 times less risky than Central Japan. It trades about 0.17 of its potential returns per unit of risk. Central Japan Railway is currently generating about 0.05 per unit of risk. If you would invest  1,751  in West Japan Railway on December 29, 2024 and sell it today you would earn a total of  259.00  from holding West Japan Railway or generate 14.79% return on investment over 90 days.

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

West Japan Railway  vs.  Central Japan Railway

West Japan Railway

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in West Japan Railway are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, West Japan showed solid returns over the last few months and may actually be approaching a breakup point.

Central Japan Railway

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Central Japan Railway are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Central Japan is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with West Japan and Central Japan

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

The idea behind West Japan Railway and Central 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.