Correlation Between Direct Line and SCOTT TECHNOLOGY

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

Diversification Opportunities for Direct Line and SCOTT TECHNOLOGY

0.44

Correlation Coefficient

Direct Line  SCOTT TECHNOLOGY

Very weak diversification

The 3 months correlation between Direct and SCOTT is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and SCOTT TECHNOLOGY in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SCOTT TECHNOLOGY 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 SCOTT TECHNOLOGY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SCOTT TECHNOLOGY has no effect on the direction of Direct Line i.e., Direct Line and SCOTT TECHNOLOGY go up and down completely randomly.

Pair Corralation between Direct Line and SCOTT TECHNOLOGY

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.39 times more return on investment than SCOTT TECHNOLOGY. However, Direct Line is 1.39 times more volatile than SCOTT TECHNOLOGY. It trades about 0.16 of its potential returns per unit of risk. SCOTT TECHNOLOGY is currently generating about 0.05 per unit of risk. If you would invest  212.00  in Direct Line Insurance on October 15, 2024 and sell it today you would earn a total of  93.00  from holding Direct Line Insurance or generate 43.87% return on investment over 90 days.

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

Direct Line Insurance  vs.  SCOTT TECHNOLOGY

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.

SCOTT TECHNOLOGY

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in SCOTT TECHNOLOGY are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical indicators, SCOTT TECHNOLOGY may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Direct Line and SCOTT TECHNOLOGY

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

The idea behind Direct Line Insurance and SCOTT TECHNOLOGY 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.