Correlation Between United States and Southwest Airlines

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

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

Diversification Opportunities for United States and Southwest Airlines

0.86

Correlation Coefficient

United States  Southwest Airlines

Very poor diversification

The 3 months correlation between United and Southwest is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding United States Steel and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and United States 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 United States Steel are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of United States i.e., United States and Southwest Airlines go up and down completely randomly.

Pair Corralation between United States and Southwest Airlines

Given the investment horizon of 90 days United States Steel is expected to generate 1.48 times more return on investment than Southwest Airlines. However, United States is 1.48 times more volatile than Southwest Airlines. It trades about 0.06 of its potential returns per unit of risk. Southwest Airlines is currently generating about -0.1 per unit of risk. If you would invest  63,597  in United States Steel on March 5, 2024 and sell it today you would earn a total of  1,460  from holding United States Steel or generate 2.3% return on investment over 90 days.

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

United States Steel  vs.  Southwest Airlines

United States Steel

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days United States Steel 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 primary indicators remain fairly strong which may send shares a bit higher in July 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

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 July 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with United States and Southwest Airlines

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

The idea behind United States Steel and Southwest Airlines 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..