Correlation Between Direct Line and United Fire

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

Diversification Opportunities for Direct Line and United Fire

-0.57

Correlation Coefficient

Direct Line  United Fire

Excellent diversification

The 3 months correlation between Direct and United is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and United Fire Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Fire Group 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 United Fire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Fire Group has no effect on the direction of Direct Line i.e., Direct Line and United Fire go up and down completely randomly.

Pair Corralation between Direct Line and United Fire

Assuming the 90 days horizon Direct Line Insurance is expected to generate 1.23 times more return on investment than United Fire. However, Direct Line is 1.23 times more volatile than United Fire Group. It trades about 0.05 of its potential returns per unit of risk. United Fire Group is currently generating about 0.05 per unit of risk. If you would invest  1,092  in Direct Line Insurance on December 2, 2024 and sell it today you would earn a total of  272.00  from holding Direct Line Insurance or generate 24.91% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	84.62%
Values	Daily Returns

Direct Line Insurance  vs.  United Fire Group

Direct Line Insurance

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 13 (%) 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.

United Fire Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days United Fire Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Direct Line and United Fire

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

The idea behind Direct Line Insurance and United Fire Group 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.