Correlation Between Southwest Airlines and Air China

Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and Air China 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 Air China 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 Air China Limited, you can compare the effects of market volatilities on Southwest Airlines and Air China 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 Air China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and Air China.

Diversification Opportunities for Southwest Airlines and Air China

0.84

Correlation Coefficient

Southwest Airlines  Air China

Very poor diversification

The 3 months correlation between Southwest and Air is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Air China Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China Limited 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 Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China Limited has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Air China go up and down completely randomly.

Pair Corralation between Southwest Airlines and Air China

Assuming the 90 days horizon Southwest Airlines is expected to generate 1.87 times less return on investment than Air China. But when comparing it to its historical volatility, Southwest Airlines Co is 2.88 times less risky than Air China. It trades about 0.27 of its potential returns per unit of risk. Air China Limited is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  57.00  in Air China Limited on October 1, 2024 and sell it today you would earn a total of  7.00  from holding Air China Limited or generate 12.28% return on investment over 90 days.

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

Southwest Airlines Co  vs.  Air China Limited

Southwest Airlines

Risk-Adjusted Performance

16 of 100

Solid

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

Air China Limited

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Limited are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Air China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Air China

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

The idea behind Southwest Airlines Co and Air China Limited 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.