Correlation Between McDonalds and Southwest Airlines
Can any of the company-specific risk be diversified away by investing in both McDonalds 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 McDonalds and Southwest Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between McDonalds and Southwest Airlines, you can compare the effects of market volatilities on McDonalds 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 McDonalds with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of McDonalds and Southwest Airlines.
Diversification Opportunities for McDonalds and Southwest Airlines
0.58 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between McDonalds and Southwest is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and McDonalds 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 McDonalds 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 McDonalds i.e., McDonalds and Southwest Airlines go up and down completely randomly.
Pair Corralation between McDonalds and Southwest Airlines
Assuming the 90 days trading horizon McDonalds is expected to generate 8.01 times less return on investment than Southwest Airlines. But when comparing it to its historical volatility, McDonalds is 1.13 times less risky than Southwest Airlines. It trades about 0.02 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest 62,200 in Southwest Airlines on September 2, 2024 and sell it today you would earn a total of 3,520 from holding Southwest Airlines or generate 5.66% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 95.24% |
| Values | Daily Returns |
McDonalds vs. Southwest Airlines
Performance |
| Timeline |
| McDonalds |
| Southwest Airlines |
McDonalds and Southwest Airlines Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with McDonalds and Southwest Airlines
The main advantage of trading using opposite McDonalds and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if McDonalds 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.| McDonalds vs. First Republic Bank | McDonalds vs. United States Steel | McDonalds vs. McEwen Mining | McDonalds vs. Genworth Financial |
| Southwest Airlines vs. Martin Marietta Materials | Southwest Airlines vs. Grupo Sports World | Southwest Airlines vs. Taiwan Semiconductor Manufacturing | Southwest Airlines vs. Cognizant Technology Solutions |
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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.
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