Correlation Between Direct Line and American Airlines

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

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

Diversification Opportunities for Direct Line and American Airlines

0.61

Correlation Coefficient

Direct Line  American Airlines

Poor diversification

The 3 months correlation between Direct and American is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines and Direct Line 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 Direct Line Insurance are associated (or correlated) with American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Direct Line i.e., Direct Line and American Airlines go up and down completely randomly.

Pair Corralation between Direct Line and American Airlines

Assuming the 90 days trading horizon Direct Line is expected to generate 1.17 times less return on investment than American Airlines. In addition to that, Direct Line is 1.13 times more volatile than American Airlines Group. It trades about 0.15 of its total potential returns per unit of risk. American Airlines Group is currently generating about 0.2 per unit of volatility. If you would invest  992.00  in American Airlines Group on September 19, 2024 and sell it today you would earn a total of  546.00  from holding American Airlines Group or generate 55.04% return on investment over 90 days.

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

Direct Line Insurance  vs.  American Airlines Group

Direct Line Insurance

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 12 (%) 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.

American Airlines

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Airlines Group are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Airlines reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and American Airlines

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

The idea behind Direct Line Insurance and American Airlines Group 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.