Correlation Between Southwest Airlines and Danaher

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

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

Diversification Opportunities for Southwest Airlines and Danaher

-0.75

Correlation Coefficient

Southwest Airlines  Danaher

Pay attention - limited upside

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

Pair Corralation between Southwest Airlines and Danaher

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.74 times more return on investment than Danaher. However, Southwest Airlines is 1.74 times more volatile than Danaher. It trades about 0.1 of its potential returns per unit of risk. Danaher is currently generating about -0.17 per unit of risk. If you would invest  64,000  in Southwest Airlines on September 26, 2024 and sell it today you would earn a total of  2,500  from holding Southwest Airlines or generate 3.91% return on investment over 90 days.

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

Southwest Airlines  vs.  Danaher

Southwest Airlines

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Southwest Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Danaher

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Danaher has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Southwest Airlines and Danaher

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

The idea behind Southwest Airlines and Danaher 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.