Correlation Between Southwest Airlines and JetBlue Airways

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

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

Diversification Opportunities for Southwest Airlines and JetBlue Airways

0.45

Correlation Coefficient

Southwest Airlines  JetBlue Airways

Very weak diversification

The 3 months correlation between Southwest and JetBlue is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and JetBlue Airways in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on JetBlue Airways 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 JetBlue Airways. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of JetBlue Airways has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and JetBlue Airways go up and down completely randomly.

Pair Corralation between Southwest Airlines and JetBlue Airways

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.32 times less return on investment than JetBlue Airways. But when comparing it to its historical volatility, Southwest Airlines is 2.78 times less risky than JetBlue Airways. It trades about 0.13 of its potential returns per unit of risk. JetBlue Airways is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  10,800  in JetBlue Airways on September 5, 2024 and sell it today you would earn a total of  1,316  from holding JetBlue Airways or generate 12.19% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Southwest Airlines  vs.  JetBlue Airways

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.

JetBlue Airways

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in JetBlue Airways are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, JetBlue Airways showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and JetBlue Airways

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

The idea behind Southwest Airlines and JetBlue Airways 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.