Correlation Between Verizon Communications and Southwest Airlines

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

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

Diversification Opportunities for Verizon Communications and Southwest Airlines

0.15

Correlation Coefficient

Verizon Communications  Southwest Airlines

Average diversification

The 3 months correlation between Verizon and Southwest is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and Southwest Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Verizon Communications 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 Verizon Communications 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 Verizon Communications i.e., Verizon Communications and Southwest Airlines go up and down completely randomly.

Pair Corralation between Verizon Communications and Southwest Airlines

Assuming the 90 days trading horizon Verizon Communications is expected to generate 2.21 times less return on investment than Southwest Airlines. But when comparing it to its historical volatility, Verizon Communications is 1.13 times less risky than Southwest Airlines. It trades about 0.03 of its potential returns per unit of risk. Southwest Airlines Co is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  15,435  in Southwest Airlines Co on September 25, 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	96.77%
Values	Daily Returns

Verizon Communications  vs.  Southwest Airlines Co

Verizon Communications

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 Verizon Communications and Southwest Airlines

The main advantage of trading using opposite Verizon Communications and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Verizon Communications 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 Verizon Communications 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.