Correlation Between Southwest Airlines and Taiwan Semiconductor

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

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

Diversification Opportunities for Southwest Airlines and Taiwan Semiconductor

0.36

Correlation Coefficient

Southwest Airlines  Taiwan Semiconductor

Weak diversification

The 3 months correlation between Southwest and Taiwan is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor 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 Taiwan Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Semiconductor has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between Southwest Airlines and Taiwan Semiconductor

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 0.82 times more return on investment than Taiwan Semiconductor. However, Southwest Airlines is 1.21 times less risky than Taiwan Semiconductor. It trades about 0.02 of its potential returns per unit of risk. Taiwan Semiconductor Manufacturing is currently generating about -0.1 per unit of risk. If you would invest  68,645  in Southwest Airlines on December 31, 2024 and sell it today you would earn a total of  1,055  from holding Southwest Airlines or generate 1.54% return on investment over 90 days.

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

Southwest Airlines  vs.  Taiwan Semiconductor Manufactu

Southwest Airlines

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Southwest Airlines is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Taiwan Semiconductor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Taiwan Semiconductor Manufacturing has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in May 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Southwest Airlines and Taiwan Semiconductor

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

The idea behind Southwest Airlines and Taiwan Semiconductor Manufacturing 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.