Correlation Between American Airlines and Norfolk Southern

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

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

Diversification Opportunities for American Airlines and Norfolk Southern

0.11

Correlation Coefficient

American Airlines  Norfolk Southern

Average diversification

The 3 months correlation between American and Norfolk is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding American Airlines Group and Norfolk Southern in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norfolk Southern and American 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 American Airlines Group are associated (or correlated) with Norfolk Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norfolk Southern has no effect on the direction of American Airlines i.e., American Airlines and Norfolk Southern go up and down completely randomly.

Pair Corralation between American Airlines and Norfolk Southern

Considering the 90-day investment horizon American Airlines Group is expected to generate 3.21 times more return on investment than Norfolk Southern. However, American Airlines is 3.21 times more volatile than Norfolk Southern. It trades about 0.22 of its potential returns per unit of risk. Norfolk Southern is currently generating about -0.57 per unit of risk. If you would invest  1,464  in American Airlines Group on September 27, 2024 and sell it today you would earn a total of  271.00  from holding American Airlines Group or generate 18.51% return on investment over 90 days.

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

American Airlines Group  vs.  Norfolk Southern

American Airlines

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Airlines Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, American Airlines disclosed solid returns over the last few months and may actually be approaching a breakup point.

Norfolk Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Norfolk Southern has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Norfolk Southern is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with American Airlines and Norfolk Southern

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

The idea behind American Airlines Group and Norfolk Southern 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.