Correlation Between SOUTHWEST AIRLINES and China Resources

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

By analyzing existing cross correlation between SOUTHWEST AIRLINES and China Resources Beer, you can compare the effects of market volatilities on SOUTHWEST AIRLINES and China Resources 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 China Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of SOUTHWEST AIRLINES and China Resources.

Diversification Opportunities for SOUTHWEST AIRLINES and China Resources

-0.53

Correlation Coefficient

SOUTHWEST AIRLINES  China Resources

Excellent diversification

The 3 months correlation between SOUTHWEST and China is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding SOUTHWEST AIRLINES and China Resources Beer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Resources Beer 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 China Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Resources Beer has no effect on the direction of SOUTHWEST AIRLINES i.e., SOUTHWEST AIRLINES and China Resources go up and down completely randomly.

Pair Corralation between SOUTHWEST AIRLINES and China Resources

Assuming the 90 days trading horizon SOUTHWEST AIRLINES is expected to generate 0.46 times more return on investment than China Resources. However, SOUTHWEST AIRLINES is 2.19 times less risky than China Resources. It trades about 0.18 of its potential returns per unit of risk. China Resources Beer is currently generating about -0.03 per unit of risk. If you would invest  2,649  in SOUTHWEST AIRLINES on September 27, 2024 and sell it today you would earn a total of  580.00  from holding SOUTHWEST AIRLINES or generate 21.9% return on investment over 90 days.

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

SOUTHWEST AIRLINES  vs.  China Resources Beer

SOUTHWEST AIRLINES

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SOUTHWEST AIRLINES are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, SOUTHWEST AIRLINES unveiled solid returns over the last few months and may actually be approaching a breakup point.

China Resources Beer

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Resources Beer has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with SOUTHWEST AIRLINES and China Resources

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

The idea behind SOUTHWEST AIRLINES and China Resources Beer 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.