Correlation Between DICKS Sporting and Direct Line

Can any of the company-specific risk be diversified away by investing in both DICKS Sporting and Direct Line 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 DICKS Sporting and Direct Line into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between DICKS Sporting Goods and Direct Line Insurance, you can compare the effects of market volatilities on DICKS Sporting and Direct Line 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 DICKS Sporting with a short position of Direct Line. Check out your portfolio center. Please also check ongoing floating volatility patterns of DICKS Sporting and Direct Line.

Diversification Opportunities for DICKS Sporting and Direct Line

0.79

Correlation Coefficient

DICKS Sporting  Direct Line

Poor diversification

The 3 months correlation between DICKS and Direct is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding DICKS Sporting Goods and Direct Line Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direct Line Insurance and DICKS Sporting 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 DICKS Sporting Goods are associated (or correlated) with Direct Line. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direct Line Insurance has no effect on the direction of DICKS Sporting i.e., DICKS Sporting and Direct Line go up and down completely randomly.

Pair Corralation between DICKS Sporting and Direct Line

Assuming the 90 days horizon DICKS Sporting Goods is expected to generate 1.01 times more return on investment than Direct Line. However, DICKS Sporting is 1.01 times more volatile than Direct Line Insurance. It trades about 0.28 of its potential returns per unit of risk. Direct Line Insurance is currently generating about 0.25 per unit of risk. If you would invest  19,606  in DICKS Sporting Goods on October 5, 2024 and sell it today you would earn a total of  2,469  from holding DICKS Sporting Goods or generate 12.59% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

DICKS Sporting Goods  vs.  Direct Line Insurance

DICKS Sporting Goods

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days DICKS Sporting Goods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, DICKS Sporting reported solid returns over the last few months and may actually be approaching a breakup point.

Direct Line Insurance

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Direct Line Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DICKS Sporting and Direct Line

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

The idea behind DICKS Sporting Goods and Direct Line 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.

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.