Correlation Between Southwest Airlines and Federal National

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

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

Diversification Opportunities for Southwest Airlines and Federal National

0.42

Correlation Coefficient

Southwest Airlines  Federal National

Very weak diversification

The 3 months correlation between Southwest and Federal is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Federal National Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal National Mortgage 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 Federal National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal National Mortgage has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Federal National go up and down completely randomly.

Pair Corralation between Southwest Airlines and Federal National

Considering the 90-day investment horizon Southwest Airlines is expected to generate 28.09 times less return on investment than Federal National. But when comparing it to its historical volatility, Southwest Airlines is 6.97 times less risky than Federal National. It trades about 0.07 of its potential returns per unit of risk. Federal National Mortgage is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  147.00  in Federal National Mortgage on October 26, 2024 and sell it today you would earn a total of  503.00  from holding Federal National Mortgage or generate 342.18% return on investment over 90 days.

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

Southwest Airlines  vs.  Federal National Mortgage

Southwest Airlines

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Federal National Mortgage

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Federal National Mortgage are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady primary indicators, Federal National sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Federal National

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

The idea behind Southwest Airlines and Federal National Mortgage 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.