Correlation Between Southwest Airlines and American Airlines
Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and American 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 Southwest Airlines and American Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Southwest Airlines and American Airlines Group, you can compare the effects of market volatilities on Southwest Airlines and American 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 Southwest Airlines with a short position of American Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and American Airlines.
Diversification Opportunities for Southwest Airlines and American Airlines
0.76 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Southwest and American is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines 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 American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and American Airlines go up and down completely randomly.
Pair Corralation between Southwest Airlines and American Airlines
Considering the 90-day investment horizon Southwest Airlines is expected to under-perform the American Airlines. In addition to that, Southwest Airlines is 1.81 times more volatile than American Airlines Group. It trades about -0.23 of its total potential returns per unit of risk. American Airlines Group is currently generating about -0.09 per unit of volatility. If you would invest 1,470 in American Airlines Group on December 19, 2023 and sell it today you would lose (58.50) from holding American Airlines Group or give up 3.98% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Significant |
Accuracy | 95.24% |
Values | Daily Returns |
Southwest Airlines vs. American Airlines Group
Performance |
Timeline |
Southwest Airlines |
American Airlines |
Southwest Airlines and American Airlines Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Southwest Airlines and American Airlines
The main advantage of trading using opposite Southwest Airlines and American Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southwest Airlines position performs unexpectedly, American 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 American Airlines will offset losses from the drop in American Airlines' long position.Southwest Airlines vs. Daseke Inc | Southwest Airlines vs. Canadian National Railway | Southwest Airlines vs. Werner Enterprises | Southwest Airlines vs. Canadian Pacific Railway |
American Airlines vs. Daseke Inc | American Airlines vs. Canadian National Railway | American Airlines vs. Werner Enterprises | American Airlines vs. Canadian Pacific Railway |
Check out your portfolio center.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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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