Correlation Between Diageo PLC and Southwest Airlines

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

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

Diversification Opportunities for Diageo PLC and Southwest Airlines

-0.64

Correlation Coefficient

Diageo PLC  Southwest Airlines

Excellent diversification

The 3 months correlation between Diageo and Southwest is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Diageo PLC 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 Diageo PLC ADR 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 Diageo PLC i.e., Diageo PLC and Southwest Airlines go up and down completely randomly.

Pair Corralation between Diageo PLC and Southwest Airlines

Considering the 90-day investment horizon Diageo PLC ADR is expected to under-perform the Southwest Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Diageo PLC ADR is 1.84 times less risky than Southwest Airlines. The stock trades about -0.04 of its potential returns per unit of risk. The Southwest Airlines is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,847  in Southwest Airlines on September 2, 2024 and sell it today you would earn a total of  389.00  from holding Southwest Airlines or generate 13.66% return on investment over 90 days.

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

Diageo PLC ADR  vs.  Southwest Airlines

Diageo PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Southwest Airlines

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 7 (%) 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 January 2025.

Pair Trading with Diageo PLC and Southwest Airlines

The main advantage of trading using opposite Diageo PLC and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diageo PLC 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 Diageo PLC ADR 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.