Correlation Between Canadian Pacific and Southwest Airlines

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

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

Diversification Opportunities for Canadian Pacific and Southwest Airlines

0.1

Correlation Coefficient

Canadian Pacific  Southwest Airlines

Average diversification

The 3 months correlation between Canadian and Southwest is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and Canadian Pacific 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 Canadian Pacific Railway 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 Canadian Pacific i.e., Canadian Pacific and Southwest Airlines go up and down completely randomly.

Pair Corralation between Canadian Pacific and Southwest Airlines

Allowing for the 90-day total investment horizon Canadian Pacific Railway is expected to under-perform the Southwest Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Canadian Pacific Railway is 2.13 times less risky than Southwest Airlines. The stock trades about -0.24 of its potential returns per unit of risk. The Southwest Airlines is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,037  in Southwest Airlines on August 13, 2024 and sell it today you would earn a total of  141.00  from holding Southwest Airlines or generate 4.64% return on investment over 90 days.

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

Canadian Pacific Railway  vs.  Southwest Airlines

Canadian Pacific Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Canadian Pacific Railway has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Canadian Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Southwest Airlines

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southwest Airlines are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Southwest Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Canadian Pacific and Southwest Airlines

The main advantage of trading using opposite Canadian Pacific and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Canadian Pacific 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 Canadian Pacific Railway 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.