Correlation Between Air China and Southwest Airlines
Can any of the company-specific risk be diversified away by investing in both Air China 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 Air China and Southwest Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Air China Limited and Southwest Airlines Co, you can compare the effects of market volatilities on Air China 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 Air China with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Air China and Southwest Airlines.
Diversification Opportunities for Air China and Southwest Airlines
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Air and Southwest is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Air China Limited and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Air China 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 Air China Limited 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 Air China i.e., Air China and Southwest Airlines go up and down completely randomly.
Pair Corralation between Air China and Southwest Airlines
Assuming the 90 days horizon Air China Limited is expected to generate 1.29 times more return on investment than Southwest Airlines. However, Air China is 1.29 times more volatile than Southwest Airlines Co. It trades about 0.32 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.13 per unit of risk. If you would invest 46.00 in Air China Limited on August 24, 2024 and sell it today you would earn a total of 10.00 from holding Air China Limited or generate 21.74% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.65% |
| Values | Daily Returns |
Air China Limited vs. Southwest Airlines Co
Performance |
| Timeline |
| Air China Limited |
| Southwest Airlines |
Air China and Southwest Airlines Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Air China and Southwest Airlines
The main advantage of trading using opposite Air China and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Air China 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.| Air China vs. RYANAIR HLDGS ADR | Air China vs. Southwest Airlines Co | Air China vs. China Southern Airlines | Air China vs. Ryanair Holdings plc |
| Southwest Airlines vs. MAVEN WIRELESS SWEDEN | Southwest Airlines vs. KRISPY KREME DL 01 | Southwest Airlines vs. Infrastrutture Wireless Italiane | Southwest Airlines vs. CENTURIA OFFICE REIT |
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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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