Correlation Between Southwest Airlines and CVS Health

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Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and CVS Health 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 CVS Health 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 CVS Health Corp, you can compare the effects of market volatilities on Southwest Airlines and CVS Health 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 CVS Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and CVS Health.

Diversification Opportunities for Southwest Airlines and CVS Health

SouthwestCVSDiversified AwaySouthwestCVSDiversified Away100%
-0.62
  Correlation Coefficient

Excellent diversification

The 3 months correlation between Southwest and CVS is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp 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 CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health Corp has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and CVS Health go up and down completely randomly.

Pair Corralation between Southwest Airlines and CVS Health

Assuming the 90 days trading horizon Southwest Airlines Co is expected to under-perform the CVS Health. But the stock apears to be less risky and, when comparing its historical volatility, Southwest Airlines Co is 2.02 times less risky than CVS Health. The stock trades about -0.05 of its potential returns per unit of risk. The CVS Health Corp is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  5,655  in CVS Health Corp on November 22, 2024 and sell it today you would earn a total of  974.00  from holding CVS Health Corp or generate 17.22% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy96.67%
ValuesDaily Returns

Southwest Airlines Co  vs.  CVS Health Corp

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -1001020
JavaScript chart by amCharts 3.21.150L8F 0HRS
       Timeline  
Southwest Airlines 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Southwest Airlines Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb303132333435
CVS Health Corp 

Risk-Adjusted Performance

OK

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health Corp are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, CVS Health unveiled solid returns over the last few months and may actually be approaching a breakup point.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb4550556065

Southwest Airlines and CVS Health Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.6-1.95-1.3-0.640.00.61.221.832.44 0.020.040.060.080.100.120.140.16
JavaScript chart by amCharts 3.21.150L8F 0HRS
       Returns  

Pair Trading with Southwest Airlines and CVS Health

The main advantage of trading using opposite Southwest Airlines and CVS Health positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Southwest Airlines position performs unexpectedly, CVS Health 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 CVS Health will offset losses from the drop in CVS Health's long position.
The idea behind Southwest Airlines Co and CVS Health Corp 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.

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