Correlation Between Align Technology and Southwest Airlines

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

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

Diversification Opportunities for Align Technology and Southwest Airlines

-0.39

Correlation Coefficient

Align Technology  Southwest Airlines

Very good diversification

The 3 months correlation between Align and Southwest is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Align Technology and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Align Technology 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 Align Technology 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 Align Technology i.e., Align Technology and Southwest Airlines go up and down completely randomly.

Pair Corralation between Align Technology and Southwest Airlines

Assuming the 90 days trading horizon Align Technology is expected to generate 0.84 times more return on investment than Southwest Airlines. However, Align Technology is 1.19 times less risky than Southwest Airlines. It trades about 0.08 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.07 per unit of risk. If you would invest  32,457  in Align Technology on September 3, 2024 and sell it today you would earn a total of  2,397  from holding Align Technology or generate 7.39% return on investment over 90 days.

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

Align Technology  vs.  Southwest Airlines Co

Align Technology

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Align Technology are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak essential indicators, Align Technology may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Southwest Airlines

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Align Technology and Southwest Airlines

The main advantage of trading using opposite Align Technology and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Align Technology 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 Align Technology and Southwest Airlines Co 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.