Correlation Between Southwest Airlines and New Oriental

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

By analyzing existing cross correlation between Southwest Airlines and New Oriental Education, you can compare the effects of market volatilities on Southwest Airlines and New Oriental 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 Southwest Airlines with a short position of New Oriental. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and New Oriental.

Diversification Opportunities for Southwest Airlines and New Oriental

0.08

Correlation Coefficient

Southwest Airlines  New Oriental

Significant diversification

The 3 months correlation between Southwest and New is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and New Oriental Education in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Oriental Education and Southwest Airlines 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 Southwest Airlines are associated (or correlated) with New Oriental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Oriental Education has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and New Oriental go up and down completely randomly.

Pair Corralation between Southwest Airlines and New Oriental

Assuming the 90 days trading horizon Southwest Airlines is expected to under-perform the New Oriental. In addition to that, Southwest Airlines is 1.33 times more volatile than New Oriental Education. It trades about -0.13 of its total potential returns per unit of risk. New Oriental Education is currently generating about -0.11 per unit of volatility. If you would invest  153,233  in New Oriental Education on February 23, 2024 and sell it today you would lose (21,233) from holding New Oriental Education or give up 13.86% of portfolio value over 90 days.

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

Southwest Airlines  vs.  New Oriental Education

Southwest Airlines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

New Oriental Education

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Oriental Education has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Southwest Airlines and New Oriental

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

The idea behind Southwest Airlines and New Oriental Education 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.