Correlation Between Honeywell International and Southwest Airlines

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

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

Diversification Opportunities for Honeywell International and Southwest Airlines

0.7

Correlation Coefficient

Honeywell International  Southwest Airlines

Poor diversification

The 3 months correlation between Honeywell and Southwest is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Honeywell International and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Honeywell International 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 Honeywell International 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 Honeywell International i.e., Honeywell International and Southwest Airlines go up and down completely randomly.

Pair Corralation between Honeywell International and Southwest Airlines

Assuming the 90 days trading horizon Honeywell International is expected to generate 1.3 times more return on investment than Southwest Airlines. However, Honeywell International is 1.3 times more volatile than Southwest Airlines. It trades about 0.05 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.05 per unit of risk. If you would invest  460,000  in Honeywell International on October 23, 2024 and sell it today you would earn a total of  6,200  from holding Honeywell International or generate 1.35% return on investment over 90 days.

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

Honeywell International  vs.  Southwest Airlines

Honeywell International

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Honeywell International are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Honeywell International may actually be approaching a critical reversion point that can send shares even higher in February 2025.

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 weak basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Honeywell International and Southwest Airlines

The main advantage of trading using opposite Honeywell International and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Honeywell International 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 Honeywell International 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..