Correlation Between Direct Line and Emerson Electric

Can any of the company-specific risk be diversified away by investing in both Direct Line and Emerson Electric 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 Emerson Electric 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 Emerson Electric, you can compare the effects of market volatilities on Direct Line and Emerson Electric 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 Emerson Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of Direct Line and Emerson Electric.

Diversification Opportunities for Direct Line and Emerson Electric

0.24

Correlation Coefficient

Direct Line  Emerson Electric

Modest diversification

The 3 months correlation between Direct and Emerson is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Emerson Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric 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 Emerson Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerson Electric has no effect on the direction of Direct Line i.e., Direct Line and Emerson Electric go up and down completely randomly.

Pair Corralation between Direct Line and Emerson Electric

Assuming the 90 days horizon Direct Line Insurance is expected to generate 2.03 times more return on investment than Emerson Electric. However, Direct Line is 2.03 times more volatile than Emerson Electric. It trades about 0.02 of its potential returns per unit of risk. Emerson Electric is currently generating about 0.05 per unit of risk. If you would invest  1,075  in Direct Line Insurance on September 24, 2024 and sell it today you would earn a total of  137.00  from holding Direct Line Insurance or generate 12.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	94.58%
Values	Daily Returns

Direct Line Insurance  vs.  Emerson Electric

Direct Line Insurance

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

Emerson Electric

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Emerson Electric are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal primary indicators, Emerson Electric reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Emerson Electric

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

The idea behind Direct Line Insurance and Emerson Electric 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.