Correlation Between Direct Line and MGIC INVESTMENT

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

Diversification Opportunities for Direct Line and MGIC INVESTMENT

0.06

Correlation Coefficient

Direct Line  MGIC INVESTMENT

Significant diversification

The 3 months correlation between Direct and MGIC is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and MGIC INVESTMENT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MGIC INVESTMENT 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 MGIC INVESTMENT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MGIC INVESTMENT has no effect on the direction of Direct Line i.e., Direct Line and MGIC INVESTMENT go up and down completely randomly.

Pair Corralation between Direct Line and MGIC INVESTMENT

Assuming the 90 days trading horizon Direct Line is expected to generate 1.97 times less return on investment than MGIC INVESTMENT. But when comparing it to its historical volatility, Direct Line Insurance is 1.1 times less risky than MGIC INVESTMENT. It trades about 0.09 of its potential returns per unit of risk. MGIC INVESTMENT is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  2,300  in MGIC INVESTMENT on October 25, 2024 and sell it today you would earn a total of  60.00  from holding MGIC INVESTMENT or generate 2.61% 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.  MGIC INVESTMENT

Direct Line Insurance

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 14 (%) 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.

MGIC INVESTMENT

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in MGIC INVESTMENT are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable fundamental indicators, MGIC INVESTMENT is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Direct Line and MGIC INVESTMENT

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

The idea behind Direct Line Insurance and MGIC INVESTMENT 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.