Correlation Between Southwest Airlines and Canadian Pacific

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

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

Diversification Opportunities for Southwest Airlines and Canadian Pacific

-0.57

Correlation Coefficient

Southwest Airlines  Canadian Pacific

Excellent diversification

The 3 months correlation between Southwest and Canadian is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Canadian Pacific Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Pacific Railway 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 Canadian Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Pacific Railway has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Canadian Pacific go up and down completely randomly.

Pair Corralation between Southwest Airlines and Canadian Pacific

Considering the 90-day investment horizon Southwest Airlines is expected to under-perform the Canadian Pacific. But the stock apears to be less risky and, when comparing its historical volatility, Southwest Airlines is 1.47 times less risky than Canadian Pacific. The stock trades about -0.27 of its potential returns per unit of risk. The Canadian Pacific Railway is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  8,070  in Canadian Pacific Railway on November 28, 2024 and sell it today you would lose (321.00) from holding Canadian Pacific Railway or give up 3.98% of portfolio value over 90 days.

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

Southwest Airlines  vs.  Canadian Pacific Railway

Southwest Airlines

Risk-Adjusted Performance

Very Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Canadian Pacific Railway

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Canadian Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Southwest Airlines and Canadian Pacific

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

The idea behind Southwest Airlines and Canadian Pacific Railway 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.