Correlation Between Norfolk Southern and Central Japan

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

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

Diversification Opportunities for Norfolk Southern and Central Japan

-0.67

Correlation Coefficient

Norfolk Southern  Central Japan

Excellent diversification

The 3 months correlation between Norfolk and Central is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Norfolk Southern 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 Norfolk Southern 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 Norfolk Southern 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 Norfolk Southern i.e., Norfolk Southern and Central Japan go up and down completely randomly.

Pair Corralation between Norfolk Southern and Central Japan

Considering the 90-day investment horizon Norfolk Southern is expected to generate 1.14 times more return on investment than Central Japan. However, Norfolk Southern is 1.14 times more volatile than Central Japan Railway. It trades about 0.02 of its potential returns per unit of risk. Central Japan Railway is currently generating about -0.01 per unit of risk. If you would invest  20,314  in Norfolk Southern on February 2, 2025 and sell it today you would earn a total of  2,122  from holding Norfolk Southern or generate 10.45% return on investment over 90 days.

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

Norfolk Southern  vs.  Central Japan Railway

Norfolk Southern

Risk-Adjusted Performance

Very Weak

Over the last 90 days Norfolk Southern has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Central Japan Railway

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Central 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, Central Japan showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norfolk Southern and Central Japan

The main advantage of trading using opposite Norfolk Southern and Central Japan positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Norfolk Southern 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 Norfolk Southern 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 Global Correlations module to find global opportunities by holding instruments from different markets.