Correlation Between Direct Line and Life Insurance

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

Diversification Opportunities for Direct Line and Life Insurance

0.59

Correlation Coefficient

Direct Line  Life Insurance

Very weak diversification

The 3 months correlation between Direct and Life is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Life Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Life Insurance 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 Life Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Life Insurance has no effect on the direction of Direct Line i.e., Direct Line and Life Insurance go up and down completely randomly.

Pair Corralation between Direct Line and Life Insurance

Assuming the 90 days horizon Direct Line Insurance is expected to generate 1.15 times more return on investment than Life Insurance. However, Direct Line is 1.15 times more volatile than Life Insurance. It trades about 0.05 of its potential returns per unit of risk. Life Insurance is currently generating about -0.08 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 Together
Strength	Weak
Accuracy	67.8%
Values	Daily Returns

Direct Line Insurance  vs.  Life Insurance

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.

Life Insurance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Life Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Life Insurance is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Direct Line and Life Insurance

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

The idea behind Direct Line Insurance and Life Insurance 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..