Correlation Between COSTCO WHOLESALE and Direct Line

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

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

Diversification Opportunities for COSTCO WHOLESALE and Direct Line

0.49

Correlation Coefficient

COSTCO WHOLESALE  Direct Line

Very weak diversification

The 3 months correlation between COSTCO and Direct is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding COSTCO WHOLESALE CDR 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 COSTCO WHOLESALE 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 COSTCO WHOLESALE CDR 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 COSTCO WHOLESALE i.e., COSTCO WHOLESALE and Direct Line go up and down completely randomly.

Pair Corralation between COSTCO WHOLESALE and Direct Line

Assuming the 90 days trading horizon COSTCO WHOLESALE is expected to generate 1.35 times less return on investment than Direct Line. But when comparing it to its historical volatility, COSTCO WHOLESALE CDR is 1.85 times less risky than Direct Line. It trades about 0.11 of its potential returns per unit of risk. Direct Line Insurance is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  167.00  in Direct Line Insurance on October 27, 2024 and sell it today you would earn a total of  147.00  from holding Direct Line Insurance or generate 88.02% return on investment over 90 days.

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

COSTCO WHOLESALE CDR  vs.  Direct Line Insurance

COSTCO WHOLESALE CDR

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in COSTCO WHOLESALE CDR are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, COSTCO WHOLESALE may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Direct Line Insurance

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 14 (%) 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 COSTCO WHOLESALE and Direct Line

The main advantage of trading using opposite COSTCO WHOLESALE and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if COSTCO WHOLESALE 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 COSTCO WHOLESALE CDR 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.