Correlation Between Direct Line and BG Foods

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

Diversification Opportunities for Direct Line and BG Foods

-0.01

Correlation Coefficient

Direct Line  BG Foods

Good diversification

The 3 months correlation between Direct and DHR is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and BG Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BG Foods 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 BG Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BG Foods has no effect on the direction of Direct Line i.e., Direct Line and BG Foods go up and down completely randomly.

Pair Corralation between Direct Line and BG Foods

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.36 times more return on investment than BG Foods. However, Direct Line is 1.36 times more volatile than BG Foods. It trades about 0.16 of its potential returns per unit of risk. BG Foods is currently generating about -0.01 per unit of risk. If you would invest  215.00  in Direct Line Insurance on October 11, 2024 and sell it today you would earn a total of  95.00  from holding Direct Line Insurance or generate 44.19% return on investment over 90 days.

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

Direct Line Insurance  vs.  BG Foods

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.

BG Foods

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BG Foods has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, BG Foods is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Direct Line and BG Foods

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

The idea behind Direct Line Insurance and BG Foods 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.