Correlation Between SOUTHWEST AIRLINES and Charter Communications

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

Diversification Opportunities for SOUTHWEST AIRLINES and Charter Communications

0.87

Correlation Coefficient

SOUTHWEST AIRLINES  Charter Communications

Very poor diversification

The 3 months correlation between SOUTHWEST and Charter is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding SOUTHWEST AIRLINES and Charter Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Charter 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 Charter Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Charter Communications has no effect on the direction of SOUTHWEST AIRLINES i.e., SOUTHWEST AIRLINES and Charter Communications go up and down completely randomly.

Pair Corralation between SOUTHWEST AIRLINES and Charter Communications

Assuming the 90 days trading horizon SOUTHWEST AIRLINES is expected to generate 1.07 times less return on investment than Charter Communications. But when comparing it to its historical volatility, SOUTHWEST AIRLINES is 1.62 times less risky than Charter Communications. It trades about 0.16 of its potential returns per unit of risk. Charter Communications is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  29,450  in Charter Communications on September 20, 2024 and sell it today you would earn a total of  5,725  from holding Charter Communications or generate 19.44% return on investment over 90 days.

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

SOUTHWEST AIRLINES  vs.  Charter Communications

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.

Charter Communications

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Charter Communications are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Charter Communications unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with SOUTHWEST AIRLINES and Charter Communications

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

The idea behind SOUTHWEST AIRLINES and Charter Communications 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.

Check out your portfolio center.

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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.