Correlation Between NetEase and Direct Line

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

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

Diversification Opportunities for NetEase and Direct Line

0.65

Correlation Coefficient

NetEase  Direct Line

Poor diversification

The 3 months correlation between NetEase and Direct is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding NetEase 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 NetEase 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 NetEase 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 NetEase i.e., NetEase and Direct Line go up and down completely randomly.

Pair Corralation between NetEase and Direct Line

Given the investment horizon of 90 days NetEase is expected to generate 1.42 times less return on investment than Direct Line. In addition to that, NetEase is 1.13 times more volatile than Direct Line Insurance. It trades about 0.09 of its total potential returns per unit of risk. Direct Line Insurance is currently generating about 0.14 per unit of volatility. If you would invest  1,212  in Direct Line Insurance on December 20, 2024 and sell it today you would earn a total of  201.00  from holding Direct Line Insurance or generate 16.58% return on investment over 90 days.

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

NetEase  vs.  Direct Line Insurance

NetEase

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NetEase are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, NetEase may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Direct Line Insurance

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NetEase and Direct Line

The main advantage of trading using opposite NetEase and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NetEase 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 NetEase 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.

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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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.