Correlation Between Southwest Airlines and Xaar Plc

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

Diversification Opportunities for Southwest Airlines and Xaar Plc

-0.59

Correlation Coefficient

Southwest Airlines  Xaar Plc

Excellent diversification

The 3 months correlation between Southwest and Xaar is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Xaar plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Xaar 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 Xaar Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Xaar plc has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Xaar Plc go up and down completely randomly.

Pair Corralation between Southwest Airlines and Xaar Plc

Assuming the 90 days trading horizon Southwest Airlines Co is expected to generate 0.4 times more return on investment than Xaar Plc. However, Southwest Airlines Co is 2.52 times less risky than Xaar Plc. It trades about 0.07 of its potential returns per unit of risk. Xaar plc is currently generating about -0.01 per unit of risk. If you would invest  3,009  in Southwest Airlines Co on October 26, 2024 and sell it today you would earn a total of  196.00  from holding Southwest Airlines Co or generate 6.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Southwest Airlines Co  vs.  Xaar plc

Southwest Airlines

Risk-Adjusted Performance

5 of 100

Modest

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.

Xaar plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Xaar plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Xaar Plc is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Southwest Airlines and Xaar Plc

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

The idea behind Southwest Airlines Co and Xaar 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.