Correlation Between United Airlines and Southwest Airlines
Can any of the company-specific risk be diversified away by investing in both United Airlines 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 Airlines 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 Airlines Holdings and Southwest Airlines, you can compare the effects of market volatilities on United Airlines 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 Airlines with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of United Airlines and Southwest Airlines.
Diversification Opportunities for United Airlines and Southwest Airlines
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between United and Southwest is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding United Airlines Holdings and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and United 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 United Airlines Holdings 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 Airlines i.e., United Airlines and Southwest Airlines go up and down completely randomly.
Pair Corralation between United Airlines and Southwest Airlines
Assuming the 90 days trading horizon United Airlines Holdings is expected to generate 1.18 times more return on investment than Southwest Airlines. However, United Airlines is 1.18 times more volatile than Southwest Airlines. It trades about 0.52 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.18 per unit of risk. 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 |
United Airlines Holdings vs. Southwest Airlines
Performance |
| Timeline |
| United Airlines Holdings |
| Southwest Airlines |
United Airlines and Southwest Airlines Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with United Airlines and Southwest Airlines
The main advantage of trading using opposite United Airlines and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United Airlines 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 Airlines Holdings 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.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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..
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