Correlation Between SOUTHWEST AIRLINES and Spirent Communications

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

By analyzing existing cross correlation between SOUTHWEST AIRLINES and Spirent Communications plc, you can compare the effects of market volatilities on SOUTHWEST AIRLINES and Spirent Communications 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 Spirent Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of SOUTHWEST AIRLINES and Spirent Communications.

Diversification Opportunities for SOUTHWEST AIRLINES and Spirent Communications

0.65

Correlation Coefficient

SOUTHWEST AIRLINES  Spirent Communications

Poor diversification

The 3 months correlation between SOUTHWEST and Spirent is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding SOUTHWEST AIRLINES and Spirent Communications plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Spirent Communications 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 are associated (or correlated) with Spirent Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Spirent Communications has no effect on the direction of SOUTHWEST AIRLINES i.e., SOUTHWEST AIRLINES and Spirent Communications go up and down completely randomly.

Pair Corralation between SOUTHWEST AIRLINES and Spirent Communications

Assuming the 90 days trading horizon SOUTHWEST AIRLINES is expected to generate 2.53 times less return on investment than Spirent Communications. But when comparing it to its historical volatility, SOUTHWEST AIRLINES is 2.02 times less risky than Spirent Communications. It trades about 0.05 of its potential returns per unit of risk. Spirent Communications plc is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  136.00  in Spirent Communications plc on September 20, 2024 and sell it today you would earn a total of  78.00  from holding Spirent Communications plc or generate 57.35% return on investment over 90 days.

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

SOUTHWEST AIRLINES  vs.  Spirent Communications plc

SOUTHWEST AIRLINES

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SOUTHWEST AIRLINES are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, SOUTHWEST AIRLINES unveiled solid returns over the last few months and may actually be approaching a breakup point.

Spirent Communications

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Spirent Communications plc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Spirent Communications 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 Spirent Communications

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

The idea behind SOUTHWEST AIRLINES and Spirent Communications plc 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.