Correlation Between Direct Line and Warehouses

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

Diversification Opportunities for Direct Line and Warehouses

-0.64

Correlation Coefficient

Direct Line  Warehouses

Excellent diversification

The 3 months correlation between Direct and Warehouses is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Warehouses De Pauw in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Warehouses De Pauw 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 Warehouses. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Warehouses De Pauw has no effect on the direction of Direct Line i.e., Direct Line and Warehouses go up and down completely randomly.

Pair Corralation between Direct Line and Warehouses

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.02 times more return on investment than Warehouses. However, Direct Line is 1.02 times more volatile than Warehouses De Pauw. It trades about 0.13 of its potential returns per unit of risk. Warehouses De Pauw is currently generating about -0.21 per unit of risk. If you would invest  296.00  in Direct Line Insurance on October 15, 2024 and sell it today you would earn a total of  9.00  from holding Direct Line Insurance or generate 3.04% return on investment over 90 days.

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

Direct Line Insurance  vs.  Warehouses De Pauw

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 uncertain essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Warehouses De Pauw

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Warehouses De Pauw has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's technical indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Direct Line and Warehouses

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

The idea behind Direct Line Insurance and Warehouses De Pauw 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..