Correlation Between Insurance Australia and American Airlines

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

By analyzing existing cross correlation between Insurance Australia Group and American Airlines Group, you can compare the effects of market volatilities on Insurance Australia and American 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 Insurance Australia with a short position of American Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Insurance Australia and American Airlines.

Diversification Opportunities for Insurance Australia and American Airlines

0.34

Correlation Coefficient

Insurance Australia  American Airlines

Weak diversification

The 3 months correlation between Insurance and American is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Insurance Australia Group and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines and Insurance Australia 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 Insurance Australia Group are associated (or correlated) with American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Insurance Australia i.e., Insurance Australia and American Airlines go up and down completely randomly.

Pair Corralation between Insurance Australia and American Airlines

Assuming the 90 days horizon Insurance Australia Group is expected to under-perform the American Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Insurance Australia Group is 1.44 times less risky than American Airlines. The stock trades about -0.04 of its potential returns per unit of risk. The American Airlines Group is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,359  in American Airlines Group on December 1, 2024 and sell it today you would earn a total of  29.00  from holding American Airlines Group or generate 2.13% return on investment over 90 days.

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

Insurance Australia Group  vs.  American Airlines Group

Insurance Australia

Risk-Adjusted Performance

Very Weak

Over the last 90 days Insurance Australia Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

American Airlines

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Airlines Group are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, American Airlines is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Insurance Australia and American Airlines

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

The idea behind Insurance Australia Group and American Airlines Group 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.