Correlation Between Southwest Airlines and Disney

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

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

Diversification Opportunities for Southwest Airlines and Disney

0.85

Correlation Coefficient

Southwest Airlines  Disney

Very poor diversification

The 3 months correlation between Southwest and Disney is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and The Walt Disney in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Walt Disney 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 Disney. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Walt Disney has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Disney go up and down completely randomly.

Pair Corralation between Southwest Airlines and Disney

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.82 times more return on investment than Disney. However, Southwest Airlines is 1.82 times more volatile than The Walt Disney. It trades about -0.06 of its potential returns per unit of risk. The Walt Disney is currently generating about -0.15 per unit of risk. If you would invest  71,209  in Southwest Airlines on October 9, 2024 and sell it today you would lose (1,509) from holding Southwest Airlines or give up 2.12% of portfolio value over 90 days.

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

Southwest Airlines  vs.  The Walt Disney

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.

Walt Disney

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in The Walt Disney are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Disney showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Disney

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

The idea behind Southwest Airlines and The Walt Disney 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..