Correlation Between Southwest Airlines and United Airlines
Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and United 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 United 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 United Airlines Holdings, you can compare the effects of market volatilities on Southwest Airlines and United 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 United Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and United Airlines.
Diversification Opportunities for Southwest Airlines and United Airlines
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Southwest and United is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and United Airlines Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Airlines Holdings 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 United Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Airlines Holdings has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and United Airlines go up and down completely randomly.
Pair Corralation between Southwest Airlines and United Airlines
Assuming the 90 days trading horizon Southwest Airlines is expected to generate 3.32 times less return on investment than United Airlines. But when comparing it to its historical volatility, Southwest Airlines is 1.18 times less risky than United Airlines. It trades about 0.18 of its potential returns per unit of risk. United Airlines Holdings is currently generating about 0.52 of returns per unit of risk over similar time horizon. If you would invest 155,799 in United Airlines Holdings on August 28, 2024 and sell it today you would earn a total of 41,430 from holding United Airlines Holdings or generate 26.59% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Southwest Airlines vs. United Airlines Holdings
Performance |
| Timeline |
| Southwest Airlines |
| United Airlines Holdings |
Southwest Airlines and United Airlines Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Southwest Airlines and United Airlines
The main advantage of trading using opposite Southwest Airlines and United Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southwest Airlines position performs unexpectedly, United 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 United Airlines will offset losses from the drop in United Airlines' long position.The idea behind Southwest Airlines and United Airlines Holdings 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.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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.
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