Correlation Between Southwest Airlines and Home Depot

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

Diversification Opportunities for Southwest Airlines and Home Depot

0.69

Correlation Coefficient

Southwest Airlines  Home Depot

Poor diversification

The 3 months correlation between Southwest and Home is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot 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 Home Depot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Depot has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Home Depot go up and down completely randomly.

Pair Corralation between Southwest Airlines and Home Depot

Assuming the 90 days trading horizon Southwest Airlines Co is expected to generate 13.07 times more return on investment than Home Depot. However, Southwest Airlines is 13.07 times more volatile than Home Depot. It trades about 0.13 of its potential returns per unit of risk. Home Depot is currently generating about 0.13 per unit of risk. If you would invest  2,846  in Southwest Airlines Co on September 14, 2024 and sell it today you would earn a total of  501.00  from holding Southwest Airlines Co or generate 17.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Southwest Airlines Co  vs.  Home Depot

Southwest Airlines

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Southwest Airlines unveiled solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Home Depot is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Southwest Airlines and Home Depot

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

The idea behind Southwest Airlines Co and Home Depot 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.