Correlation Between Norsk Hydro and Southwest Airlines

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

By analyzing existing cross correlation between Norsk Hydro ASA and Southwest Airlines Co, you can compare the effects of market volatilities on Norsk Hydro and Southwest Airlines 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 Norsk Hydro with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norsk Hydro and Southwest Airlines.

Diversification Opportunities for Norsk Hydro and Southwest Airlines

0.68

Correlation Coefficient

Norsk Hydro  Southwest Airlines

Poor diversification

The 3 months correlation between Norsk and Southwest is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Norsk Hydro 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 Norsk Hydro ASA are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and Southwest Airlines go up and down completely randomly.

Pair Corralation between Norsk Hydro and Southwest Airlines

Assuming the 90 days trading horizon Norsk Hydro ASA is expected to generate 1.53 times more return on investment than Southwest Airlines. However, Norsk Hydro is 1.53 times more volatile than Southwest Airlines Co. It trades about 0.11 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.15 per unit of risk. If you would invest  505.00  in Norsk Hydro ASA on August 31, 2024 and sell it today you would earn a total of  99.00  from holding Norsk Hydro ASA or generate 19.6% return on investment over 90 days.

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

Norsk Hydro ASA  vs.  Southwest Airlines Co

Norsk Hydro ASA

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Norsk Hydro ASA are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain technical indicators, Norsk Hydro reported solid returns over the last few months and may actually be approaching a breakup point.

Southwest Airlines

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Southwest Airlines reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Norsk Hydro and Southwest Airlines

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

The idea behind Norsk Hydro ASA and Southwest Airlines Co 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.