Correlation Between East Africa and Southwest Airlines

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

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

Diversification Opportunities for East Africa and Southwest Airlines

-0.57

Correlation Coefficient

East Africa  Southwest Airlines

Excellent diversification

The 3 months correlation between East and Southwest is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding East Africa Metals and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and East Africa 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 East Africa Metals 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 East Africa i.e., East Africa and Southwest Airlines go up and down completely randomly.

Pair Corralation between East Africa and Southwest Airlines

Assuming the 90 days horizon East Africa Metals is expected to under-perform the Southwest Airlines. In addition to that, East Africa is 1.46 times more volatile than Southwest Airlines. It trades about -0.15 of its total potential returns per unit of risk. Southwest Airlines is currently generating about 0.1 per unit of volatility. If you would invest  2,963  in Southwest Airlines on September 23, 2024 and sell it today you would earn a total of  365.00  from holding Southwest Airlines or generate 12.32% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.48%
Values	Daily Returns

East Africa Metals  vs.  Southwest Airlines

East Africa Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days East Africa Metals has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's primary indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Southwest Airlines

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with East Africa and Southwest Airlines

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