Correlation Between Air China and Southwest Airlines

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

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

Diversification Opportunities for Air China and Southwest Airlines

0.84

Correlation Coefficient

Air China  Southwest Airlines

Very poor diversification

The 3 months correlation between Air and Southwest is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Air China Limited and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Air China 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 Air China Limited 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 Air China i.e., Air China and Southwest Airlines go up and down completely randomly.

Pair Corralation between Air China and Southwest Airlines

Assuming the 90 days horizon Air China Limited is expected to generate 2.46 times more return on investment than Southwest Airlines. However, Air China is 2.46 times more volatile than Southwest Airlines Co. It trades about 0.22 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.16 per unit of risk. If you would invest  34.00  in Air China Limited on September 23, 2024 and sell it today you would earn a total of  29.00  from holding Air China Limited or generate 85.29% return on investment over 90 days.

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

Air China Limited  vs.  Southwest Airlines Co

Air China Limited

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Limited are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Air China reported solid returns over the last few months and may actually be approaching a breakup point.

Southwest Airlines

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Southwest Airlines reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Air China and Southwest Airlines

The main advantage of trading using opposite Air China and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Air China 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 Air China Limited 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.