Correlation Between Petrleo Brasileiro and Southwest Airlines

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

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

Diversification Opportunities for Petrleo Brasileiro and Southwest Airlines

-0.22

Correlation Coefficient

Petrleo Brasileiro  Southwest Airlines

Very good diversification

The 3 months correlation between Petrleo and Southwest is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Petrleo Brasileiro SA and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Petrleo Brasileiro 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 Petrleo Brasileiro SA 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 Petrleo Brasileiro i.e., Petrleo Brasileiro and Southwest Airlines go up and down completely randomly.

Pair Corralation between Petrleo Brasileiro and Southwest Airlines

Assuming the 90 days trading horizon Petrleo Brasileiro SA is expected to generate 0.94 times more return on investment than Southwest Airlines. However, Petrleo Brasileiro SA is 1.07 times less risky than Southwest Airlines. It trades about 0.06 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.03 per unit of risk. If you would invest  15,504  in Petrleo Brasileiro SA on December 12, 2024 and sell it today you would earn a total of  10,096  from holding Petrleo Brasileiro SA or generate 65.12% return on investment over 90 days.

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

Petrleo Brasileiro SA  vs.  Southwest Airlines

Petrleo Brasileiro

Risk-Adjusted Performance

Very Weak

Over the last 90 days Petrleo Brasileiro SA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Petrleo Brasileiro is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Southwest Airlines

Risk-Adjusted Performance

Very Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Petrleo Brasileiro and Southwest Airlines

The main advantage of trading using opposite Petrleo Brasileiro and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Petrleo Brasileiro 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 Petrleo Brasileiro SA and Southwest Airlines 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.