Correlation Between Direct Line and Gladstone Investment

Can any of the company-specific risk be diversified away by investing in both Direct Line and Gladstone Investment 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 Gladstone Investment 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 Gladstone Investment, you can compare the effects of market volatilities on Direct Line and Gladstone Investment 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 Gladstone Investment. Check out your portfolio center. Please also check ongoing floating volatility patterns of Direct Line and Gladstone Investment.

Diversification Opportunities for Direct Line and Gladstone Investment

0.1

Correlation Coefficient

Direct Line  Gladstone Investment

Average diversification

The 3 months correlation between Direct and Gladstone is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Gladstone Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gladstone Investment 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 Gladstone Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gladstone Investment has no effect on the direction of Direct Line i.e., Direct Line and Gladstone Investment go up and down completely randomly.

Pair Corralation between Direct Line and Gladstone Investment

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 0.96 times more return on investment than Gladstone Investment. However, Direct Line Insurance is 1.04 times less risky than Gladstone Investment. It trades about 0.24 of its potential returns per unit of risk. Gladstone Investment is currently generating about 0.15 per unit of risk. If you would invest  290.00  in Direct Line Insurance on October 20, 2024 and sell it today you would earn a total of  17.00  from holding Direct Line Insurance or generate 5.86% return on investment over 90 days.

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

Direct Line Insurance  vs.  Gladstone Investment

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.

Gladstone Investment

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Direct Line and Gladstone Investment

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

The idea behind Direct Line Insurance and Gladstone Investment 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.