Correlation Between Canadian Pacific and Southwest Airlines

Can any of the company-specific risk be diversified away by investing in both Canadian Pacific and Southwest Airlines 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 Canadian Pacific and Southwest Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Canadian Pacific Railway and Southwest Airlines, you can compare the effects of market volatilities on Canadian Pacific and Southwest Airlines 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 Canadian Pacific with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Canadian Pacific and Southwest Airlines.

Diversification Opportunities for Canadian Pacific and Southwest Airlines

-0.76

Correlation Coefficient

Canadian Pacific  Southwest Airlines

Pay attention - limited upside

The 3 months correlation between Canadian and Southwest is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Canadian Pacific 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 Canadian Pacific Railway are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of Canadian Pacific i.e., Canadian Pacific and Southwest Airlines go up and down completely randomly.

Pair Corralation between Canadian Pacific and Southwest Airlines

Allowing for the 90-day total investment horizon Canadian Pacific Railway is expected to under-perform the Southwest Airlines. In addition to that, Canadian Pacific is 1.11 times more volatile than Southwest Airlines. It trades about -0.09 of its total potential returns per unit of risk. Southwest Airlines is currently generating about -0.01 per unit of volatility. If you would invest  3,372  in Southwest Airlines on October 8, 2024 and sell it today you would lose (11.00) from holding Southwest Airlines or give up 0.33% of portfolio value over 90 days.

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

Canadian Pacific Railway  vs.  Southwest Airlines

Canadian Pacific Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Canadian Pacific Railway has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest weak performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Southwest Airlines

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Canadian Pacific and Southwest Airlines

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

The idea behind Canadian Pacific Railway and Southwest Airlines 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.