Correlation Between Southwest Airlines and Caterpillar

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

Diversification Opportunities for Southwest Airlines and Caterpillar

0.78

Correlation Coefficient

Southwest Airlines  Caterpillar

Poor diversification

The 3 months correlation between Southwest and Caterpillar is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar 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 Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Caterpillar go up and down completely randomly.

Pair Corralation between Southwest Airlines and Caterpillar

Assuming the 90 days horizon Southwest Airlines is expected to generate 1.55 times less return on investment than Caterpillar. In addition to that, Southwest Airlines is 1.0 times more volatile than Caterpillar. It trades about 0.13 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.2 per unit of volatility. If you would invest  30,381  in Caterpillar on September 4, 2024 and sell it today you would earn a total of  8,119  from holding Caterpillar or generate 26.72% return on investment over 90 days.

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

Southwest Airlines Co  vs.  Caterpillar

Southwest Airlines

Risk-Adjusted Performance

10 of 100

OK

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

Caterpillar

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Caterpillar

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

The idea behind Southwest Airlines Co and Caterpillar 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.