Correlation Between West Japan and East Japan

Can any of the company-specific risk be diversified away by investing in both West Japan 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 West Japan and East 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 East Japan Railway, you can compare the effects of market volatilities on West Japan 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 West Japan with a short position of East Japan. Check out your portfolio center. Please also check ongoing floating volatility patterns of West Japan and East Japan.

Diversification Opportunities for West Japan and East Japan

0.97

Correlation Coefficient

West Japan  East Japan

Almost no diversification

The 3 months correlation between West and East is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding West Japan Railway 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 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 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 West Japan i.e., West Japan and East Japan go up and down completely randomly.

Pair Corralation between West Japan and East Japan

Assuming the 90 days horizon West Japan Railway is expected to generate 1.16 times more return on investment than East Japan. However, West Japan is 1.16 times more volatile than East Japan Railway. It trades about 0.18 of its potential returns per unit of risk. East Japan Railway is currently generating about 0.19 per unit of risk. If you would invest  1,751  in West Japan Railway on December 28, 2024 and sell it today you would earn a total of  270.00  from holding West Japan Railway or generate 15.42% 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.  East 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.

East Japan Railway

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in East Japan Railway are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, East Japan showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with West Japan and East Japan

The main advantage of trading using opposite West Japan and East Japan positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if West Japan 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 West Japan Railway 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.