Correlation Between Direct Line and IPG Photonics

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

Diversification Opportunities for Direct Line and IPG Photonics

-0.26

Correlation Coefficient

Direct Line  IPG Photonics

Very good diversification

The 3 months correlation between Direct and IPG is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and IPG Photonics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IPG Photonics 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 IPG Photonics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IPG Photonics has no effect on the direction of Direct Line i.e., Direct Line and IPG Photonics go up and down completely randomly.

Pair Corralation between Direct Line and IPG Photonics

Assuming the 90 days horizon Direct Line Insurance is expected to generate 1.26 times more return on investment than IPG Photonics. However, Direct Line is 1.26 times more volatile than IPG Photonics. It trades about 0.05 of its potential returns per unit of risk. IPG Photonics is currently generating about -0.02 per unit of risk. If you would invest  832.00  in Direct Line Insurance on October 11, 2024 and sell it today you would earn a total of  455.00  from holding Direct Line Insurance or generate 54.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	94.75%
Values	Daily Returns

Direct Line Insurance  vs.  IPG Photonics

Direct Line Insurance

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

IPG Photonics

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days IPG Photonics has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, IPG Photonics is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Direct Line and IPG Photonics

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

The idea behind Direct Line Insurance and IPG Photonics 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.