Correlation Between Southwest Airlines and Eaton Plc

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

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

Diversification Opportunities for Southwest Airlines and Eaton Plc

0.5

Correlation Coefficient

Southwest Airlines  Eaton Plc

Very weak diversification

The 3 months correlation between Southwest and Eaton is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Eaton plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eaton plc 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 Co are associated (or correlated) with Eaton Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eaton plc has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Eaton Plc go up and down completely randomly.

Pair Corralation between Southwest Airlines and Eaton Plc

Assuming the 90 days trading horizon Southwest Airlines is expected to generate 1.77 times less return on investment than Eaton Plc. In addition to that, Southwest Airlines is 1.16 times more volatile than Eaton plc. It trades about 0.07 of its total potential returns per unit of risk. Eaton plc is currently generating about 0.14 per unit of volatility. If you would invest  12,987  in Eaton plc on September 25, 2024 and sell it today you would earn a total of  1,758  from holding Eaton plc or generate 13.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.77%
Values	Daily Returns

Southwest Airlines Co  vs.  Eaton plc

Southwest Airlines

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines Co are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Southwest Airlines may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Eaton plc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Eaton plc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Eaton Plc sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Southwest Airlines and Eaton Plc

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

The idea behind Southwest Airlines Co and Eaton plc 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..