Correlation Between Southwest Airlines and Applied Materials

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

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

Diversification Opportunities for Southwest Airlines and Applied Materials

-0.74

Correlation Coefficient

Southwest Airlines  Applied Materials

Pay attention - limited upside

The 3 months correlation between Southwest and Applied is -0.74. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Applied Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Materials 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 Applied Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Materials has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Applied Materials go up and down completely randomly.

Pair Corralation between Southwest Airlines and Applied Materials

Assuming the 90 days trading horizon Southwest Airlines is expected to under-perform the Applied Materials. In addition to that, Southwest Airlines is 1.24 times more volatile than Applied Materials. It trades about -0.09 of its total potential returns per unit of risk. Applied Materials is currently generating about 0.0 per unit of volatility. If you would invest  349,500  in Applied Materials on October 7, 2024 and sell it today you would lose (1,000.00) from holding Applied Materials or give up 0.29% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

Southwest Airlines  vs.  Applied Materials

Southwest Airlines

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Southwest Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Applied Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Southwest Airlines and Applied Materials

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

The idea behind Southwest Airlines and Applied Materials 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.