Correlation Between Southwest Airlines and London Security

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

Diversification Opportunities for Southwest Airlines and London Security

-0.73

Correlation Coefficient

Southwest Airlines  London Security

Pay attention - limited upside

The 3 months correlation between Southwest and London is -0.73. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and London Security Plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Security Plc 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 London Security. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Security Plc has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and London Security go up and down completely randomly.

Pair Corralation between Southwest Airlines and London Security

Assuming the 90 days trading horizon Southwest Airlines Co is expected to generate 1.32 times more return on investment than London Security. However, Southwest Airlines is 1.32 times more volatile than London Security Plc. It trades about 0.06 of its potential returns per unit of risk. London Security Plc is currently generating about -0.09 per unit of risk. If you would invest  3,014  in Southwest Airlines Co on October 23, 2024 and sell it today you would earn a total of  192.00  from holding Southwest Airlines Co or generate 6.37% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Southwest Airlines Co  vs.  London Security Plc

Southwest Airlines

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 4 (%) 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 February 2025.

London Security Plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days London Security Plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Southwest Airlines and London Security

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

The idea behind Southwest Airlines Co and London Security Plc 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.