Correlation Between Direct Line and BANK OF CHINA

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

Diversification Opportunities for Direct Line and BANK OF CHINA

0.72

Correlation Coefficient

Direct Line  BANK OF CHINA

Poor diversification

The 3 months correlation between Direct and BANK is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and BANK OF CHINA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BANK OF CHINA 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 BANK OF CHINA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BANK OF CHINA has no effect on the direction of Direct Line i.e., Direct Line and BANK OF CHINA go up and down completely randomly.

Pair Corralation between Direct Line and BANK OF CHINA

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.05 times more return on investment than BANK OF CHINA. However, Direct Line is 1.05 times more volatile than BANK OF CHINA. It trades about 0.1 of its potential returns per unit of risk. BANK OF CHINA is currently generating about 0.1 per unit of risk. If you would invest  302.00  in Direct Line Insurance on October 10, 2024 and sell it today you would earn a total of  7.00  from holding Direct Line Insurance or generate 2.32% 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.  BANK OF CHINA

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.

BANK OF CHINA

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BANK OF CHINA are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, BANK OF CHINA may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Direct Line and BANK OF CHINA

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

The idea behind Direct Line Insurance and BANK OF CHINA 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.