Correlation Between Southwest Airlines and Advanced Micro

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

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

Diversification Opportunities for Southwest Airlines and Advanced Micro

-0.3

Correlation Coefficient

Southwest Airlines  Advanced Micro

Very good diversification

The 3 months correlation between Southwest and Advanced is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Advanced Micro Devices in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Micro Devices 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 Advanced Micro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Micro Devices has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Advanced Micro go up and down completely randomly.

Pair Corralation between Southwest Airlines and Advanced Micro

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.0 times more return on investment than Advanced Micro. However, Southwest Airlines is 1.0 times less risky than Advanced Micro. It trades about 0.24 of its potential returns per unit of risk. Advanced Micro Devices is currently generating about 0.06 per unit of risk. If you would invest  62,200  in Southwest Airlines on September 5, 2024 and sell it today you would earn a total of  5,389  from holding Southwest Airlines or generate 8.66% return on investment over 90 days.

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

Southwest Airlines  vs.  Advanced Micro Devices

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.

Advanced Micro Devices

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Advanced Micro Devices are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, Advanced Micro may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Southwest Airlines and Advanced Micro

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

The idea behind Southwest Airlines and Advanced Micro Devices 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 Global Correlations module to find global opportunities by holding instruments from different markets.