Correlation Between Southwest Airlines and ABB

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

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

Diversification Opportunities for Southwest Airlines and ABB

0.29

Correlation Coefficient

Southwest Airlines  ABB

Modest diversification

The 3 months correlation between Southwest and ABB is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and ABB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABB and Southwest Airlines 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 Southwest Airlines Co are associated (or correlated) with ABB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABB has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and ABB go up and down completely randomly.

Pair Corralation between Southwest Airlines and ABB

Assuming the 90 days horizon Southwest Airlines is expected to generate 1.18 times less return on investment than ABB. In addition to that, Southwest Airlines is 1.29 times more volatile than ABB. It trades about 0.01 of its total potential returns per unit of risk. ABB is currently generating about 0.02 per unit of volatility. If you would invest  5,150  in ABB on December 23, 2024 and sell it today you would earn a total of  50.00  from holding ABB or generate 0.97% return on investment over 90 days.

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

Southwest Airlines Co  vs.  ABB

Southwest Airlines

Risk-Adjusted Performance

Very Weak

Over the last 90 days Southwest Airlines Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

ABB

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in ABB are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable forward-looking indicators, ABB is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Southwest Airlines and ABB

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

The idea behind Southwest Airlines Co and ABB 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.