Correlation Between Cathay Pacific and Air France

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

By analyzing existing cross correlation between Cathay Pacific Airways and Air France KLM SA, you can compare the effects of market volatilities on Cathay Pacific and Air France 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 Cathay Pacific with a short position of Air France. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Pacific and Air France.

Diversification Opportunities for Cathay Pacific and Air France

0.75

Correlation Coefficient

Cathay Pacific  Air France

Poor diversification

The 3 months correlation between Cathay and Air is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Pacific Airways and Air France KLM SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air France KLM and Cathay Pacific 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 Cathay Pacific Airways are associated (or correlated) with Air France. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air France KLM has no effect on the direction of Cathay Pacific i.e., Cathay Pacific and Air France go up and down completely randomly.

Pair Corralation between Cathay Pacific and Air France

Assuming the 90 days horizon Cathay Pacific Airways is expected to under-perform the Air France. But the pink sheet apears to be less risky and, when comparing its historical volatility, Cathay Pacific Airways is 59.33 times less risky than Air France. The pink sheet trades about 0.0 of its potential returns per unit of risk. The Air France KLM SA is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,855  in Air France KLM SA on September 14, 2024 and sell it today you would lose (1,049) from holding Air France KLM SA or give up 56.55% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	51.3%
Values	Daily Returns

Cathay Pacific Airways  vs.  Air France KLM SA

Cathay Pacific Airways

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cathay Pacific Airways has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Cathay Pacific is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Air France KLM

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Air France KLM SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Air France is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Cathay Pacific and Air France

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

The idea behind Cathay Pacific Airways and Air France KLM SA 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.