Correlation Between Donegal Group and HCI

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

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

Diversification Opportunities for Donegal Group and HCI

0.39

Correlation Coefficient

Donegal Group  HCI

Weak diversification

The 3 months correlation between Donegal and HCI is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Donegal Group A and HCI Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HCI Group and Donegal Group 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 Donegal Group A are associated (or correlated) with HCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HCI Group has no effect on the direction of Donegal Group i.e., Donegal Group and HCI go up and down completely randomly.

Pair Corralation between Donegal Group and HCI

Assuming the 90 days horizon Donegal Group is expected to generate 2.41 times less return on investment than HCI. But when comparing it to its historical volatility, Donegal Group A is 1.84 times less risky than HCI. It trades about 0.1 of its potential returns per unit of risk. HCI Group is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  9,599  in HCI Group on September 4, 2024 and sell it today you would earn a total of  2,776  from holding HCI Group or generate 28.92% return on investment over 90 days.

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

Donegal Group A  vs.  HCI Group

Donegal Group A

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Donegal Group A are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat conflicting fundamental indicators, Donegal Group may actually be approaching a critical reversion point that can send shares even higher in January 2025.

HCI Group

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in HCI Group are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady fundamental indicators, HCI demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Donegal Group and HCI

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

The idea behind Donegal Group A and HCI 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.

Check out your portfolio center.

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.