Correlation Between Valero Energy and Southwest Airlines

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

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

Diversification Opportunities for Valero Energy and Southwest Airlines

0.3

Correlation Coefficient

Valero Energy  Southwest Airlines

Weak diversification

The 3 months correlation between Valero and Southwest is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Valero Energy and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Valero Energy 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 Valero Energy 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 Valero Energy i.e., Valero Energy and Southwest Airlines go up and down completely randomly.

Pair Corralation between Valero Energy and Southwest Airlines

Assuming the 90 days trading horizon Valero Energy is expected to under-perform the Southwest Airlines. In addition to that, Valero Energy is 1.09 times more volatile than Southwest Airlines. It trades about -0.06 of its total potential returns per unit of risk. Southwest Airlines is currently generating about 0.12 per unit of volatility. If you would invest  58,501  in Southwest Airlines on September 26, 2024 and sell it today you would earn a total of  7,999  from holding Southwest Airlines or generate 13.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

Valero Energy  vs.  Southwest Airlines

Valero Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Valero Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Southwest Airlines

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Southwest Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Valero Energy and Southwest Airlines

The main advantage of trading using opposite Valero Energy and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Valero Energy 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 Valero Energy and Southwest Airlines 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .