Correlation Between SkyWest and West Red

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

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

Diversification Opportunities for SkyWest and West Red

-0.92

Correlation Coefficient

SkyWest  West Red

Pay attention - limited upside

The 3 months correlation between SkyWest and West is -0.92. Overlapping area represents the amount of risk that can be diversified away by holding SkyWest and West Red Lake in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on West Red Lake and SkyWest 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 SkyWest are associated (or correlated) with West Red. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of West Red Lake has no effect on the direction of SkyWest i.e., SkyWest and West Red go up and down completely randomly.

Pair Corralation between SkyWest and West Red

Given the investment horizon of 90 days SkyWest is expected to under-perform the West Red. But the stock apears to be less risky and, when comparing its historical volatility, SkyWest is 1.92 times less risky than West Red. The stock trades about -0.11 of its potential returns per unit of risk. The West Red Lake is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  42.00  in West Red Lake on September 15, 2024 and sell it today you would lose (1.00) from holding West Red Lake or give up 2.38% of portfolio value over 90 days.

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

SkyWest  vs.  West Red Lake

SkyWest

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in SkyWest are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, SkyWest showed solid returns over the last few months and may actually be approaching a breakup point.

West Red Lake

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days West Red Lake has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with SkyWest and West Red

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

The idea behind SkyWest and West Red Lake 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..