Correlation Between Direct Line and CECO Environmental

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

Diversification Opportunities for Direct Line and CECO Environmental

-0.72

Correlation Coefficient

Direct Line  CECO Environmental

Pay attention - limited upside

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

Pair Corralation between Direct Line and CECO Environmental

Assuming the 90 days horizon Direct Line Insurance is expected to generate 0.72 times more return on investment than CECO Environmental. However, Direct Line Insurance is 1.4 times less risky than CECO Environmental. It trades about 0.13 of its potential returns per unit of risk. CECO Environmental Corp is currently generating about -0.12 per unit of risk. If you would invest  1,267  in Direct Line Insurance on December 28, 2024 and sell it today you would earn a total of  193.00  from holding Direct Line Insurance or generate 15.23% 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.  CECO Environmental Corp

Direct Line Insurance

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

CECO Environmental Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days CECO Environmental Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's fundamental indicators remain very healthy which may send shares a bit higher in April 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Direct Line and CECO Environmental

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

The idea behind Direct Line Insurance and CECO Environmental Corp 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.