Correlation Between PENN NATL and SOUTHWEST AIRLINES

Can any of the company-specific risk be diversified away by investing in both PENN NATL 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 PENN NATL and SOUTHWEST AIRLINES into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between PENN NATL GAMING and SOUTHWEST AIRLINES, you can compare the effects of market volatilities on PENN NATL 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 PENN NATL with a short position of SOUTHWEST AIRLINES. Check out your portfolio center. Please also check ongoing floating volatility patterns of PENN NATL and SOUTHWEST AIRLINES.

Diversification Opportunities for PENN NATL and SOUTHWEST AIRLINES

0.71

Correlation Coefficient

PENN NATL  SOUTHWEST AIRLINES

Poor diversification

The 3 months correlation between PENN and SOUTHWEST is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding PENN NATL GAMING and SOUTHWEST AIRLINES in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SOUTHWEST AIRLINES and PENN NATL 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 PENN NATL GAMING 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 PENN NATL i.e., PENN NATL and SOUTHWEST AIRLINES go up and down completely randomly.

Pair Corralation between PENN NATL and SOUTHWEST AIRLINES

Assuming the 90 days trading horizon PENN NATL GAMING is expected to under-perform the SOUTHWEST AIRLINES. In addition to that, PENN NATL is 1.51 times more volatile than SOUTHWEST AIRLINES. It trades about -0.02 of its total potential returns per unit of risk. SOUTHWEST AIRLINES is currently generating about 0.01 per unit of volatility. If you would invest  3,237  in SOUTHWEST AIRLINES on October 4, 2024 and sell it today you would earn a total of  1.00  from holding SOUTHWEST AIRLINES or generate 0.03% return on investment over 90 days.

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

PENN NATL GAMING  vs.  SOUTHWEST AIRLINES

PENN NATL GAMING

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in PENN NATL GAMING are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, PENN NATL may actually be approaching a critical reversion point that can send shares even higher in February 2025.

SOUTHWEST AIRLINES

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SOUTHWEST AIRLINES are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, SOUTHWEST AIRLINES unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with PENN NATL and SOUTHWEST AIRLINES

The main advantage of trading using opposite PENN NATL and SOUTHWEST AIRLINES positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PENN NATL 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's long position.

The idea behind PENN NATL GAMING 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.