Correlation Between Major Drilling and Direct Line

Can any of the company-specific risk be diversified away by investing in both Major Drilling and Direct Line 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 Major Drilling and Direct Line into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Major Drilling Group and Direct Line Insurance, you can compare the effects of market volatilities on Major Drilling and Direct Line 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 Major Drilling with a short position of Direct Line. Check out your portfolio center. Please also check ongoing floating volatility patterns of Major Drilling and Direct Line.

Diversification Opportunities for Major Drilling and Direct Line

0.14

Correlation Coefficient

Major Drilling  Direct Line

Average diversification

The 3 months correlation between Major and Direct is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Major Drilling Group and Direct Line Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direct Line Insurance and Major Drilling 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 Major Drilling Group are associated (or correlated) with Direct Line. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direct Line Insurance has no effect on the direction of Major Drilling i.e., Major Drilling and Direct Line go up and down completely randomly.

Pair Corralation between Major Drilling and Direct Line

Assuming the 90 days horizon Major Drilling Group is expected to under-perform the Direct Line. But the stock apears to be less risky and, when comparing its historical volatility, Major Drilling Group is 1.53 times less risky than Direct Line. The stock trades about -0.01 of its potential returns per unit of risk. The Direct Line Insurance is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  193.00  in Direct Line Insurance on October 15, 2024 and sell it today you would earn a total of  112.00  from holding Direct Line Insurance or generate 58.03% return on investment over 90 days.

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

Major Drilling Group  vs.  Direct Line Insurance

Major Drilling Group

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Major Drilling Group are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Major Drilling may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Direct Line Insurance

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Major Drilling and Direct Line

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

The idea behind Major Drilling Group and Direct Line Insurance 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.