Correlation Between Southwest Airlines and Severn Trent

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

By analyzing existing cross correlation between Southwest Airlines and Severn Trent PLC, you can compare the effects of market volatilities on Southwest Airlines and Severn Trent 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 Severn Trent. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and Severn Trent.

Diversification Opportunities for Southwest Airlines and Severn Trent

-0.02

Correlation Coefficient

Southwest Airlines  Severn Trent

Good diversification

The 3 months correlation between Southwest and Severn is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and Severn Trent PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Severn Trent PLC 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 Severn Trent. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Severn Trent PLC has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and Severn Trent go up and down completely randomly.

Pair Corralation between Southwest Airlines and Severn Trent

Considering the 90-day investment horizon Southwest Airlines is expected to generate 1.99 times less return on investment than Severn Trent. In addition to that, Southwest Airlines is 6.34 times more volatile than Severn Trent PLC. It trades about 0.01 of its total potential returns per unit of risk. Severn Trent PLC is currently generating about 0.13 per unit of volatility. If you would invest  3,063  in Severn Trent PLC on March 14, 2024 and sell it today you would earn a total of  89.00  from holding Severn Trent PLC or generate 2.91% return on investment over 90 days.

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

Southwest Airlines  vs.  Severn Trent PLC

Southwest Airlines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Severn Trent PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Severn Trent PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Severn Trent is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Southwest Airlines and Severn Trent

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

The idea behind Southwest Airlines and Severn Trent PLC 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.