Correlation Between Direct Line and British American

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

Diversification Opportunities for Direct Line and British American

0.66

Correlation Coefficient

Direct Line  British American

Poor diversification

The 3 months correlation between Direct and British is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco 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 British American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of Direct Line i.e., Direct Line and British American go up and down completely randomly.

Pair Corralation between Direct Line and British American

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 6.15 times more return on investment than British American. However, Direct Line is 6.15 times more volatile than British American Tobacco. It trades about 0.21 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.25 per unit of risk. If you would invest  203.00  in Direct Line Insurance on September 26, 2024 and sell it today you would earn a total of  101.00  from holding Direct Line Insurance or generate 49.75% 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.  British American Tobacco

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 unsteady essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

British American Tobacco

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, British American is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Direct Line and British American

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

The idea behind Direct Line Insurance and British American Tobacco 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.