Correlation Between LATAM Airlines and SkyWest

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

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

Diversification Opportunities for LATAM Airlines and SkyWest

0.57

Correlation Coefficient

LATAM Airlines  SkyWest

Very weak diversification

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

Pair Corralation between LATAM Airlines and SkyWest

Considering the 90-day investment horizon LATAM Airlines is expected to generate 4.29 times less return on investment than SkyWest. But when comparing it to its historical volatility, LATAM Airlines Group is 1.7 times less risky than SkyWest. It trades about 0.06 of its potential returns per unit of risk. SkyWest is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1,959  in SkyWest on October 11, 2024 and sell it today you would earn a total of  9,145  from holding SkyWest or generate 466.82% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	23.59%
Values	Daily Returns

LATAM Airlines Group  vs.  SkyWest

LATAM Airlines Group

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in LATAM Airlines Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, LATAM Airlines is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

SkyWest

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SkyWest are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SkyWest showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with LATAM Airlines and SkyWest

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

The idea behind LATAM Airlines Group and SkyWest 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.