Correlation Between Tarena International and Southwest Airlines

Can any of the company-specific risk be diversified away by investing in both Tarena International and Southwest Airlines 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 Tarena International and Southwest Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Tarena International and Southwest Airlines, you can compare the effects of market volatilities on Tarena International and Southwest Airlines 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 Tarena International with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tarena International and Southwest Airlines.

Diversification Opportunities for Tarena International and Southwest Airlines

0.24

Correlation Coefficient

Tarena International  Southwest Airlines

Modest diversification

The 3 months correlation between Tarena and Southwest is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Tarena International and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Tarena International 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 Tarena International are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of Tarena International i.e., Tarena International and Southwest Airlines go up and down completely randomly.

Pair Corralation between Tarena International and Southwest Airlines

Given the investment horizon of 90 days Tarena International is expected to generate 22.14 times more return on investment than Southwest Airlines. However, Tarena International is 22.14 times more volatile than Southwest Airlines. It trades about 0.06 of its potential returns per unit of risk. Southwest Airlines is currently generating about 0.02 per unit of risk. If you would invest  68.00  in Tarena International on December 29, 2024 and sell it today you would lose (28.00) from holding Tarena International or give up 41.18% of portfolio value over 90 days.

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

Tarena International  vs.  Southwest Airlines

Tarena International

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Tarena International are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Tarena International displayed solid returns over the last few months and may actually be approaching a breakup point.

Southwest Airlines

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Tarena International and Southwest Airlines

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

The idea behind Tarena International and Southwest Airlines 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.