Correlation Between Southwest Airlines and Costco Wholesale

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

Diversification Opportunities for Southwest Airlines and Costco Wholesale

0.89

Correlation Coefficient

Southwest Airlines  Costco Wholesale

Very poor diversification

The 3 months correlation between Southwest and Costco is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Costco Wholesale Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Costco Wholesale Corp 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 Costco Wholesale. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Costco Wholesale Corp has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Costco Wholesale go up and down completely randomly.

Pair Corralation between Southwest Airlines and Costco Wholesale

Assuming the 90 days horizon Southwest Airlines Co is expected to generate 1.62 times more return on investment than Costco Wholesale. However, Southwest Airlines is 1.62 times more volatile than Costco Wholesale Corp. It trades about 0.17 of its potential returns per unit of risk. Costco Wholesale Corp is currently generating about 0.2 per unit of risk. If you would invest  2,609  in Southwest Airlines Co on September 12, 2024 and sell it today you would earn a total of  573.00  from holding Southwest Airlines Co or generate 21.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.46%
Values	Daily Returns

Southwest Airlines Co  vs.  Costco Wholesale Corp

Southwest Airlines

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 13 (%) 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.

Costco Wholesale Corp

Risk-Adjusted Performance

15 of 100

Good

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

Pair Trading with Southwest Airlines and Costco Wholesale

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

The idea behind Southwest Airlines Co and Costco Wholesale Corp 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.