Correlation Between AS Latvijas and Direct Line

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

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

Diversification Opportunities for AS Latvijas and Direct Line

0.22

Correlation Coefficient

AS Latvijas  Direct Line

Modest diversification

The 3 months correlation between UM9 and Direct is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding AS Latvijas balzams 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 AS Latvijas 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 AS Latvijas balzams 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 AS Latvijas i.e., AS Latvijas and Direct Line go up and down completely randomly.

Pair Corralation between AS Latvijas and Direct Line

Assuming the 90 days trading horizon AS Latvijas balzams is expected to under-perform the Direct Line. But the stock apears to be less risky and, when comparing its historical volatility, AS Latvijas balzams is 6.1 times less risky than Direct Line. The stock trades about -0.38 of its potential returns per unit of risk. The Direct Line Insurance is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  276.00  in Direct Line Insurance on October 5, 2024 and sell it today you would earn a total of  31.00  from holding Direct Line Insurance or generate 11.23% return on investment over 90 days.

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

AS Latvijas balzams  vs.  Direct Line Insurance

AS Latvijas balzams

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AS Latvijas balzams has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, AS Latvijas is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

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 AS Latvijas and Direct Line

The main advantage of trading using opposite AS Latvijas and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AS Latvijas 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 AS Latvijas balzams 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.