Correlation Between Direct Line and Red Branch

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

Diversification Opportunities for Direct Line and Red Branch

0.0

Correlation Coefficient

Direct Line  Red Branch

Pay attention - limited upside

The 3 months correlation between Direct and Red is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Red Branch Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Red Branch Technologies 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 Red Branch. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Red Branch Technologies has no effect on the direction of Direct Line i.e., Direct Line and Red Branch go up and down completely randomly.

Pair Corralation between Direct Line and Red Branch

If you would invest  1,397  in Direct Line Insurance on December 4, 2024 and sell it today you would earn a total of  77.00  from holding Direct Line Insurance or generate 5.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Direct Line Insurance  vs.  Red Branch Technologies

Direct Line Insurance

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 16 (%) 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.

Red Branch Technologies

Risk-Adjusted Performance

Very Weak

Over the last 90 days Red Branch Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Red Branch is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Direct Line and Red Branch

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

The idea behind Direct Line Insurance and Red Branch Technologies 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.