Correlation Between Southwest Airlines and Ally Financial

Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and Ally Financial 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 Ally Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Southwest Airlines Co and Ally Financial, you can compare the effects of market volatilities on Southwest Airlines and Ally Financial 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 Ally Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and Ally Financial.

Diversification Opportunities for Southwest Airlines and Ally Financial

0.79

Correlation Coefficient

Southwest Airlines  Ally Financial

Poor diversification

The 3 months correlation between Southwest and Ally is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Ally Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ally Financial 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 Co are associated (or correlated) with Ally Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ally Financial has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Ally Financial go up and down completely randomly.

Pair Corralation between Southwest Airlines and Ally Financial

Assuming the 90 days trading horizon Southwest Airlines Co is expected to generate 1.2 times more return on investment than Ally Financial. However, Southwest Airlines is 1.2 times more volatile than Ally Financial. It trades about 0.09 of its potential returns per unit of risk. Ally Financial is currently generating about 0.02 per unit of risk. If you would invest  2,944  in Southwest Airlines Co on September 21, 2024 and sell it today you would earn a total of  347.00  from holding Southwest Airlines Co or generate 11.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Southwest Airlines Co  vs.  Ally Financial

Southwest Airlines

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ally Financial

Risk-Adjusted Performance

1 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ally Financial are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Ally Financial is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Southwest Airlines and Ally Financial

The main advantage of trading using opposite Southwest Airlines and Ally Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southwest Airlines position performs unexpectedly, Ally Financial 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 Ally Financial will offset losses from the drop in Ally Financial's long position.

The idea behind Southwest Airlines Co and Ally Financial 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.

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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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.