Correlation Between Safety Insurance and Direct Line

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

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

Diversification Opportunities for Safety Insurance and Direct Line

-0.59

Correlation Coefficient

Safety Insurance  Direct Line

Excellent diversification

The 3 months correlation between Safety and Direct is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Safety Insurance Group 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 Safety Insurance 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 Safety Insurance Group 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 Safety Insurance i.e., Safety Insurance and Direct Line go up and down completely randomly.

Pair Corralation between Safety Insurance and Direct Line

Assuming the 90 days horizon Safety Insurance Group is expected to under-perform the Direct Line. In addition to that, Safety Insurance is 1.07 times more volatile than Direct Line Insurance. It trades about -0.08 of its total potential returns per unit of risk. Direct Line Insurance is currently generating about 0.2 per unit of volatility. If you would invest  276.00  in Direct Line Insurance on December 2, 2024 and sell it today you would earn a total of  56.00  from holding Direct Line Insurance or generate 20.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Safety Insurance Group  vs.  Direct Line Insurance

Safety Insurance

Risk-Adjusted Performance

Very Weak

Over the last 90 days Safety Insurance Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

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 15 (%) of all global equities and portfolios over the last 90 days. 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 Safety Insurance and Direct Line

The main advantage of trading using opposite Safety Insurance and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Safety Insurance 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 Safety Insurance Group 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 Transaction History module to view history of all your transactions and understand their impact on performance.