Correlation Between Direct Line and Japan Post

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

Diversification Opportunities for Direct Line and Japan Post

0.59

Correlation Coefficient

Direct Line  Japan Post

Very weak diversification

The 3 months correlation between Direct and Japan is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Japan Post Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Post Insurance 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 Japan Post. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Post Insurance has no effect on the direction of Direct Line i.e., Direct Line and Japan Post go up and down completely randomly.

Pair Corralation between Direct Line and Japan Post

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.48 times more return on investment than Japan Post. However, Direct Line is 1.48 times more volatile than Japan Post Insurance. It trades about 0.06 of its potential returns per unit of risk. Japan Post Insurance is currently generating about 0.01 per unit of risk. If you would invest  235.00  in Direct Line Insurance on September 23, 2024 and sell it today you would earn a total of  55.00  from holding Direct Line Insurance or generate 23.4% return on investment over 90 days.

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

Direct Line Insurance  vs.  Japan Post Insurance

Direct Line Insurance

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 10 (%) 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.

Japan Post Insurance

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Post Insurance are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Japan Post may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Direct Line and Japan Post

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

The idea behind Direct Line Insurance and Japan Post 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.