Correlation Between Alaska Air and Watsco

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

By analyzing existing cross correlation between Alaska Air Group and Watsco Inc, you can compare the effects of market volatilities on Alaska Air and Watsco 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 Alaska Air with a short position of Watsco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alaska Air and Watsco.

Diversification Opportunities for Alaska Air and Watsco

0.6

Correlation Coefficient

Alaska Air  Watsco

Poor diversification

The 3 months correlation between Alaska and Watsco is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Alaska Air Group and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Alaska Air 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 Alaska Air Group are associated (or correlated) with Watsco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watsco Inc has no effect on the direction of Alaska Air i.e., Alaska Air and Watsco go up and down completely randomly.

Pair Corralation between Alaska Air and Watsco

Assuming the 90 days trading horizon Alaska Air Group is expected to generate 1.6 times more return on investment than Watsco. However, Alaska Air is 1.6 times more volatile than Watsco Inc. It trades about 0.32 of its potential returns per unit of risk. Watsco Inc is currently generating about 0.08 per unit of risk. If you would invest  4,364  in Alaska Air Group on September 26, 2024 and sell it today you would earn a total of  2,060  from holding Alaska Air Group or generate 47.2% return on investment over 90 days.

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

Alaska Air Group  vs.  Watsco Inc

Alaska Air Group

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Alaska Air Group are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Alaska Air unveiled solid returns over the last few months and may actually be approaching a breakup point.

Watsco Inc

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Watsco is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Alaska Air and Watsco

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

The idea behind Alaska Air Group and Watsco Inc 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.