Correlation Between Southwest Airlines and Transocean

Can any of the company-specific risk be diversified away by investing in both Southwest Airlines and Transocean 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 Transocean 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 Transocean, you can compare the effects of market volatilities on Southwest Airlines and Transocean 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 Transocean. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and Transocean.

Diversification Opportunities for Southwest Airlines and Transocean

0.04

Correlation Coefficient

Southwest Airlines  Transocean

Significant diversification

The 3 months correlation between Southwest and Transocean is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines Co and Transocean in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transocean 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 Transocean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transocean has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Transocean go up and down completely randomly.

Pair Corralation between Southwest Airlines and Transocean

Assuming the 90 days trading horizon Southwest Airlines Co is expected to generate 0.61 times more return on investment than Transocean. However, Southwest Airlines Co is 1.65 times less risky than Transocean. It trades about 0.07 of its potential returns per unit of risk. Transocean is currently generating about 0.0 per unit of risk. If you would invest  15,435  in Southwest Airlines Co on September 14, 2024 and sell it today you would earn a total of  1,021  from holding Southwest Airlines Co or generate 6.61% return on investment over 90 days.

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

Southwest Airlines Co  vs.  Transocean

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.

Transocean

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Transocean has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Transocean is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Southwest Airlines and Transocean

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

The idea behind Southwest Airlines Co and Transocean 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.