Correlation Between Southwest Airlines and Arca Continental

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

By analyzing existing cross correlation between Southwest Airlines and Arca Continental SAB, you can compare the effects of market volatilities on Southwest Airlines and Arca Continental 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 Arca Continental. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and Arca Continental.

Diversification Opportunities for Southwest Airlines and Arca Continental

-0.49

Correlation Coefficient

Southwest Airlines  Arca Continental

Very good diversification

The 3 months correlation between Southwest and Arca is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Arca Continental SAB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arca Continental SAB 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 are associated (or correlated) with Arca Continental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arca Continental SAB has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Arca Continental go up and down completely randomly.

Pair Corralation between Southwest Airlines and Arca Continental

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 7.08 times less return on investment than Arca Continental. In addition to that, Southwest Airlines is 1.51 times more volatile than Arca Continental SAB. It trades about 0.02 of its total potential returns per unit of risk. Arca Continental SAB is currently generating about 0.23 per unit of volatility. If you would invest  17,250  in Arca Continental SAB on December 30, 2024 and sell it today you would earn a total of  4,239  from holding Arca Continental SAB or generate 24.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.41%
Values	Daily Returns

Southwest Airlines  vs.  Arca Continental SAB

Southwest Airlines

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Southwest Airlines is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Arca Continental SAB

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Arca Continental SAB are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak primary indicators, Arca Continental showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Arca Continental

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

The idea behind Southwest Airlines and Arca Continental SAB 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..