Correlation Between Direct Line and TTW Public

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

Diversification Opportunities for Direct Line and TTW Public

0.04

Correlation Coefficient

Direct Line  TTW Public

Significant diversification

The 3 months correlation between Direct and TTW is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and TTW Public in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TTW Public 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 TTW Public. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TTW Public has no effect on the direction of Direct Line i.e., Direct Line and TTW Public go up and down completely randomly.

Pair Corralation between Direct Line and TTW Public

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.5 times more return on investment than TTW Public. However, Direct Line is 1.5 times more volatile than TTW Public. It trades about 0.08 of its potential returns per unit of risk. TTW Public is currently generating about 0.01 per unit of risk. If you would invest  185.00  in Direct Line Insurance on October 9, 2024 and sell it today you would earn a total of  124.00  from holding Direct Line Insurance or generate 67.03% 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.  TTW Public

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.

TTW Public

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days TTW Public has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, TTW Public 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 TTW Public

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

The idea behind Direct Line Insurance and TTW Public 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.