Correlation Between Urban Outfitters and American Airlines

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

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

Diversification Opportunities for Urban Outfitters and American Airlines

0.68

Correlation Coefficient

Urban Outfitters  American Airlines

Poor diversification

The 3 months correlation between Urban and American is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Urban Outfitters and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines and Urban Outfitters 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 Urban Outfitters are associated (or correlated) with American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Urban Outfitters i.e., Urban Outfitters and American Airlines go up and down completely randomly.

Pair Corralation between Urban Outfitters and American Airlines

Given the investment horizon of 90 days Urban Outfitters is expected to under-perform the American Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Urban Outfitters is 1.12 times less risky than American Airlines. The stock trades about -0.09 of its potential returns per unit of risk. The American Airlines Group is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,416  in American Airlines Group on February 3, 2024 and sell it today you would lose (31.00) from holding American Airlines Group or give up 2.19% of portfolio value over 90 days.

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

Urban Outfitters  vs.  American Airlines Group

Urban Outfitters

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Urban Outfitters has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental drivers, Urban Outfitters is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

American Airlines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Airlines Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, American Airlines is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Urban Outfitters and American Airlines

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

The idea behind Urban Outfitters and American Airlines Group 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.