Correlation Between Tesla and Southwest Airlines

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

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

Diversification Opportunities for Tesla and Southwest Airlines

0.2

Correlation Coefficient

Tesla  Southwest Airlines

Modest diversification

The 3 months correlation between Tesla and Southwest is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Tesla Inc and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Tesla 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 Tesla Inc are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of Tesla i.e., Tesla and Southwest Airlines go up and down completely randomly.

Pair Corralation between Tesla and Southwest Airlines

Assuming the 90 days trading horizon Tesla Inc is expected to generate 2.37 times more return on investment than Southwest Airlines. However, Tesla is 2.37 times more volatile than Southwest Airlines Co. It trades about 0.3 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.07 per unit of risk. If you would invest  3,897  in Tesla Inc on September 15, 2024 and sell it today you would earn a total of  4,363  from holding Tesla Inc or generate 111.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Tesla Inc  vs.  Southwest Airlines Co

Tesla Inc

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Tesla Inc are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak essential indicators, Tesla sustained solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Tesla and Southwest Airlines

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

The idea behind Tesla Inc and Southwest Airlines Co 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.