Correlation Between Southwest Airlines and Eli Lilly

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

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

Diversification Opportunities for Southwest Airlines and Eli Lilly

-0.66

Correlation Coefficient

Southwest Airlines  Eli Lilly

Excellent diversification

The 3 months correlation between Southwest and Eli is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Eli Lilly and in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eli Lilly 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 Eli Lilly. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eli Lilly has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Eli Lilly go up and down completely randomly.

Pair Corralation between Southwest Airlines and Eli Lilly

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.39 times less return on investment than Eli Lilly. But when comparing it to its historical volatility, Southwest Airlines is 1.1 times less risky than Eli Lilly. It trades about 0.1 of its potential returns per unit of risk. Eli Lilly and is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,522,125  in Eli Lilly and on September 26, 2024 and sell it today you would earn a total of  84,175  from holding Eli Lilly and or generate 5.53% 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.  Eli Lilly and

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.

Eli Lilly

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eli Lilly and has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Southwest Airlines and Eli Lilly

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

The idea behind Southwest Airlines and Eli Lilly and 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.