Correlation Between Southwest Airlines and DS Smith

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

Diversification Opportunities for Southwest Airlines and DS Smith

0.57

Correlation Coefficient

Southwest Airlines  DS Smith

Very weak diversification

The 3 months correlation between Southwest and SMDS is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and DS Smith PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DS Smith 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 DS Smith. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DS Smith PLC has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and DS Smith go up and down completely randomly.

Pair Corralation between Southwest Airlines and DS Smith

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 2.59 times less return on investment than DS Smith. But when comparing it to its historical volatility, Southwest Airlines Co is 1.17 times less risky than DS Smith. It trades about 0.06 of its potential returns per unit of risk. DS Smith PLC is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  45,392  in DS Smith PLC on October 9, 2024 and sell it today you would earn a total of  9,008  from holding DS Smith PLC or generate 19.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Southwest Airlines Co  vs.  DS Smith PLC

Southwest Airlines

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 5 (%) 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.

DS Smith PLC

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in DS Smith PLC are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, DS Smith unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and DS Smith

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

The idea behind Southwest Airlines Co and DS Smith 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.