Correlation Between Direct Line and Synchrony Financial

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

Diversification Opportunities for Direct Line and Synchrony Financial

0.51

Correlation Coefficient

Direct Line  Synchrony Financial

Very weak diversification

The 3 months correlation between Direct and Synchrony is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Synchrony Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Synchrony Financial 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 Synchrony Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Synchrony Financial has no effect on the direction of Direct Line i.e., Direct Line and Synchrony Financial go up and down completely randomly.

Pair Corralation between Direct Line and Synchrony Financial

Assuming the 90 days trading horizon Direct Line is expected to generate 1.21 times less return on investment than Synchrony Financial. In addition to that, Direct Line is 1.61 times more volatile than Synchrony Financial. It trades about 0.04 of its total potential returns per unit of risk. Synchrony Financial is currently generating about 0.09 per unit of volatility. If you would invest  2,834  in Synchrony Financial on October 10, 2024 and sell it today you would earn a total of  3,602  from holding Synchrony Financial or generate 127.1% 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.  Synchrony Financial

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.

Synchrony Financial

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Synchrony Financial are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Synchrony Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Synchrony Financial

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

The idea behind Direct Line Insurance and Synchrony Financial 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.

Check out your portfolio center.

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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..