Correlation Between Southwest Airlines and Newpark Resources

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

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

Diversification Opportunities for Southwest Airlines and Newpark Resources

0.1

Correlation Coefficient

Southwest Airlines  Newpark Resources

Average diversification

The 3 months correlation between Southwest and Newpark is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Newpark Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Newpark Resources 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 Newpark Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Newpark Resources has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Newpark Resources go up and down completely randomly.

Pair Corralation between Southwest Airlines and Newpark Resources

Considering the 90-day investment horizon Southwest Airlines is expected to generate 0.75 times more return on investment than Newpark Resources. However, Southwest Airlines is 1.33 times less risky than Newpark Resources. It trades about 0.09 of its potential returns per unit of risk. Newpark Resources is currently generating about 0.05 per unit of risk. If you would invest  2,940  in Southwest Airlines on September 2, 2024 and sell it today you would earn a total of  296.00  from holding Southwest Airlines or generate 10.07% return on investment over 90 days.

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

Southwest Airlines  vs.  Newpark Resources

Southwest Airlines

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 7 (%) 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 January 2025.

Newpark Resources

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Newpark Resources are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain basic indicators, Newpark Resources may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Southwest Airlines and Newpark Resources

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

The idea behind Southwest Airlines and Newpark Resources 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.