Correlation Between Direct Line and Virtu Financial

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

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

Diversification Opportunities for Direct Line and Virtu Financial

0.63

Correlation Coefficient

Direct Line  Virtu Financial

Poor diversification

The 3 months correlation between Direct and Virtu is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Virtu Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Virtu Financial and Direct Line 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 Direct Line Insurance are associated (or correlated) with Virtu Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Virtu Financial has no effect on the direction of Direct Line i.e., Direct Line and Virtu Financial go up and down completely randomly.

Pair Corralation between Direct Line and Virtu Financial

Assuming the 90 days trading horizon Direct Line is expected to generate 1.04 times less return on investment than Virtu Financial. In addition to that, Direct Line is 1.54 times more volatile than Virtu Financial. It trades about 0.07 of its total potential returns per unit of risk. Virtu Financial is currently generating about 0.12 per unit of volatility. If you would invest  1,450  in Virtu Financial on October 22, 2024 and sell it today you would earn a total of  2,150  from holding Virtu Financial or generate 148.28% return on investment over 90 days.

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

Direct Line Insurance  vs.  Virtu Financial

Direct Line Insurance

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 13 (%) 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.

Virtu Financial

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with Direct Line and Virtu Financial

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

The idea behind Direct Line Insurance and Virtu Financial 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.