Correlation Between Southwest Airlines and China Railway

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

Diversification Opportunities for Southwest Airlines and China Railway

0.09

Correlation Coefficient

Southwest Airlines  China Railway

Significant diversification

The 3 months correlation between Southwest and China is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and China Railway Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Group 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 China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Group has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and China Railway go up and down completely randomly.

Pair Corralation between Southwest Airlines and China Railway

Assuming the 90 days horizon Southwest Airlines Co is expected to generate 1.16 times more return on investment than China Railway. However, Southwest Airlines is 1.16 times more volatile than China Railway Group. It trades about -0.01 of its potential returns per unit of risk. China Railway Group is currently generating about -0.02 per unit of risk. If you would invest  3,224  in Southwest Airlines Co on December 30, 2024 and sell it today you would lose (95.00) from holding Southwest Airlines Co or give up 2.95% of portfolio value over 90 days.

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

Southwest Airlines Co  vs.  China Railway Group

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 current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Railway Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Railway Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, China Railway 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 China Railway

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

The idea behind Southwest Airlines Co and China Railway Group 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.