Correlation Between Southwest Airlines and Knight Transportation

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

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

Diversification Opportunities for Southwest Airlines and Knight Transportation

-0.16

Correlation Coefficient

Southwest Airlines  Knight Transportation

Good diversification

The 3 months correlation between Southwest and Knight is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Knight Transportation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Knight Transportation 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 Knight Transportation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Knight Transportation has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Knight Transportation go up and down completely randomly.

Pair Corralation between Southwest Airlines and Knight Transportation

Considering the 90-day investment horizon Southwest Airlines is expected to generate 1.12 times more return on investment than Knight Transportation. However, Southwest Airlines is 1.12 times more volatile than Knight Transportation. It trades about 0.02 of its potential returns per unit of risk. Knight Transportation is currently generating about -0.16 per unit of risk. If you would invest  3,336  in Southwest Airlines on December 29, 2024 and sell it today you would earn a total of  23.00  from holding Southwest Airlines or generate 0.69% return on investment over 90 days.

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

Southwest Airlines  vs.  Knight Transportation

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 stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Knight Transportation

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Southwest Airlines and Knight Transportation

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

The idea behind Southwest Airlines and Knight Transportation 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.