Correlation Between Starbucks and Southwest Airlines

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

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

Diversification Opportunities for Starbucks and Southwest Airlines

0.75

Correlation Coefficient

Starbucks  Southwest Airlines

Poor diversification

The 3 months correlation between Starbucks and Southwest is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Starbucks and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Starbucks 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 Starbucks 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 Starbucks i.e., Starbucks and Southwest Airlines go up and down completely randomly.

Pair Corralation between Starbucks and Southwest Airlines

Assuming the 90 days trading horizon Starbucks is expected to generate 9.33 times less return on investment than Southwest Airlines. But when comparing it to its historical volatility, Starbucks is 1.14 times less risky than Southwest Airlines. It trades about 0.03 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  54,610  in Southwest Airlines on September 18, 2024 and sell it today you would earn a total of  13,390  from holding Southwest Airlines or generate 24.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.39%
Values	Daily Returns

Starbucks  vs.  Southwest Airlines

Starbucks

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Starbucks are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Starbucks 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

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Southwest Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Starbucks and Southwest Airlines

The main advantage of trading using opposite Starbucks and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Starbucks 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 Starbucks 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.

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.