Correlation Between Direct Line and Ultra Clean

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

Diversification Opportunities for Direct Line and Ultra Clean

0.66

Correlation Coefficient

Direct Line  Ultra Clean

Poor diversification

The 3 months correlation between Direct and Ultra is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Ultra Clean Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra Clean Holdings 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 Ultra Clean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra Clean Holdings has no effect on the direction of Direct Line i.e., Direct Line and Ultra Clean go up and down completely randomly.

Pair Corralation between Direct Line and Ultra Clean

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.26 times more return on investment than Ultra Clean. However, Direct Line is 1.26 times more volatile than Ultra Clean Holdings. It trades about 0.19 of its potential returns per unit of risk. Ultra Clean Holdings is currently generating about 0.09 per unit of risk. If you would invest  204.00  in Direct Line Insurance on October 25, 2024 and sell it today you would earn a total of  110.00  from holding Direct Line Insurance or generate 53.92% return on investment over 90 days.

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

Direct Line Insurance  vs.  Ultra Clean Holdings

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.

Ultra Clean Holdings

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Clean Holdings are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Ultra Clean reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Ultra Clean

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

The idea behind Direct Line Insurance and Ultra Clean Holdings 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.