Correlation Between Universal Insurance and Direct Line

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

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

Diversification Opportunities for Universal Insurance and Direct Line

-0.63

Correlation Coefficient

Universal Insurance  Direct Line

Excellent diversification

The 3 months correlation between Universal and Direct is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding Universal Insurance Holdings 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 Universal Insurance 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 Universal Insurance Holdings 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 Universal Insurance i.e., Universal Insurance and Direct Line go up and down completely randomly.

Pair Corralation between Universal Insurance and Direct Line

Assuming the 90 days horizon Universal Insurance is expected to generate 3255.0 times less return on investment than Direct Line. In addition to that, Universal Insurance is 1.27 times more volatile than Direct Line Insurance. It trades about 0.0 of its total potential returns per unit of risk. Direct Line Insurance is currently generating about 0.21 per unit of volatility. If you would invest  276.00  in Direct Line Insurance on December 4, 2024 and sell it today you would earn a total of  56.00  from holding Direct Line Insurance or generate 20.29% return on investment over 90 days.

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

Universal Insurance Holdings  vs.  Direct Line Insurance

Universal Insurance

Risk-Adjusted Performance

Very Weak

Over the last 90 days Universal Insurance Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Universal Insurance is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Direct Line Insurance

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Universal Insurance and Direct Line

The main advantage of trading using opposite Universal Insurance and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Universal Insurance 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 Universal Insurance Holdings 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.