Correlation Between SOUTHWEST AIRLINES and Columbia Sportswear

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

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

Diversification Opportunities for SOUTHWEST AIRLINES and Columbia Sportswear

0.85

Correlation Coefficient

SOUTHWEST AIRLINES  Columbia Sportswear

Very poor diversification

The 3 months correlation between SOUTHWEST and Columbia is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding SOUTHWEST AIRLINES and Columbia Sportswear in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Columbia Sportswear 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 Columbia Sportswear. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Columbia Sportswear has no effect on the direction of SOUTHWEST AIRLINES i.e., SOUTHWEST AIRLINES and Columbia Sportswear go up and down completely randomly.

Pair Corralation between SOUTHWEST AIRLINES and Columbia Sportswear

Assuming the 90 days trading horizon SOUTHWEST AIRLINES is expected to generate 0.8 times more return on investment than Columbia Sportswear. However, SOUTHWEST AIRLINES is 1.25 times less risky than Columbia Sportswear. It trades about 0.09 of its potential returns per unit of risk. Columbia Sportswear is currently generating about -0.2 per unit of risk. If you would invest  3,208  in SOUTHWEST AIRLINES on October 9, 2024 and sell it today you would earn a total of  43.00  from holding SOUTHWEST AIRLINES or generate 1.34% 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.  Columbia Sportswear

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 fragile basic indicators, SOUTHWEST AIRLINES unveiled solid returns over the last few months and may actually be approaching a breakup point.

Columbia Sportswear

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Columbia Sportswear are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Columbia Sportswear may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with SOUTHWEST AIRLINES and Columbia Sportswear

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

The idea behind SOUTHWEST AIRLINES and Columbia Sportswear 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.