Correlation Between Southwest Airlines and TopBuild Corp

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

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

Diversification Opportunities for Southwest Airlines and TopBuild Corp

0.83

Correlation Coefficient

Southwest Airlines  TopBuild Corp

Very poor diversification

The 3 months correlation between Southwest and TopBuild is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and TopBuild Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TopBuild Corp 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 TopBuild Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TopBuild Corp has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and TopBuild Corp go up and down completely randomly.

Pair Corralation between Southwest Airlines and TopBuild Corp

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 2.31 times more return on investment than TopBuild Corp. However, Southwest Airlines is 2.31 times more volatile than TopBuild Corp. It trades about 0.14 of its potential returns per unit of risk. TopBuild Corp is currently generating about 0.21 per unit of risk. If you would invest  57,599  in Southwest Airlines on September 23, 2024 and sell it today you would earn a total of  9,401  from holding Southwest Airlines or generate 16.32% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Southwest Airlines  vs.  TopBuild Corp

Southwest Airlines

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 11 (%) 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.

TopBuild Corp

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in TopBuild Corp are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, TopBuild Corp may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Southwest Airlines and TopBuild Corp

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

The idea behind Southwest Airlines and TopBuild Corp 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.