Correlation Between NORFOLK and Direct Line

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

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

Diversification Opportunities for NORFOLK and Direct Line

-0.38

Correlation Coefficient

NORFOLK  Direct Line

Very good diversification

The 3 months correlation between NORFOLK and Direct is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding NORFOLK SOUTHN P 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 NORFOLK 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 NORFOLK SOUTHN P 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 NORFOLK i.e., NORFOLK and Direct Line go up and down completely randomly.

Pair Corralation between NORFOLK and Direct Line

Assuming the 90 days trading horizon NORFOLK SOUTHN P is expected to under-perform the Direct Line. But the bond apears to be less risky and, when comparing its historical volatility, NORFOLK SOUTHN P is 1.64 times less risky than Direct Line. The bond trades about -0.17 of its potential returns per unit of risk. The Direct Line Insurance is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,253  in Direct Line Insurance on October 13, 2024 and sell it today you would earn a total of  34.00  from holding Direct Line Insurance or generate 2.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.0%
Values	Daily Returns

NORFOLK SOUTHN P  vs.  Direct Line Insurance

NORFOLK SOUTHN P

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NORFOLK SOUTHN P has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, NORFOLK is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Direct Line Insurance

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NORFOLK and Direct Line

The main advantage of trading using opposite NORFOLK and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NORFOLK 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 NORFOLK SOUTHN P 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.