Correlation Between Direct Line and Meritage Homes

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

Diversification Opportunities for Direct Line and Meritage Homes

-0.25

Correlation Coefficient

Direct Line  Meritage Homes

Very good diversification

The 3 months correlation between Direct and Meritage is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Meritage Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meritage Homes 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 Meritage Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meritage Homes has no effect on the direction of Direct Line i.e., Direct Line and Meritage Homes go up and down completely randomly.

Pair Corralation between Direct Line and Meritage Homes

Assuming the 90 days trading horizon Direct Line is expected to generate 1.53 times less return on investment than Meritage Homes. But when comparing it to its historical volatility, Direct Line Insurance is 1.62 times less risky than Meritage Homes. It trades about 0.04 of its potential returns per unit of risk. Meritage Homes is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  4,892  in Meritage Homes on October 26, 2024 and sell it today you would earn a total of  2,858  from holding Meritage Homes or generate 58.42% 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.  Meritage Homes

Direct Line Insurance

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 15 (%) 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.

Meritage Homes

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Meritage Homes are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Meritage Homes unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Meritage Homes

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

The idea behind Direct Line Insurance and Meritage Homes 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.