Correlation Between Direct Line and West China

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

Diversification Opportunities for Direct Line and West China

0.07

Correlation Coefficient

Direct Line  West China

Significant diversification

The 3 months correlation between Direct and West is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and West China Cement in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on West China Cement 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 West China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of West China Cement has no effect on the direction of Direct Line i.e., Direct Line and West China go up and down completely randomly.

Pair Corralation between Direct Line and West China

Assuming the 90 days horizon Direct Line is expected to generate 1.21 times less return on investment than West China. In addition to that, Direct Line is 1.13 times more volatile than West China Cement. It trades about 0.13 of its total potential returns per unit of risk. West China Cement is currently generating about 0.17 per unit of volatility. If you would invest  15.00  in West China Cement on September 13, 2024 and sell it today you would earn a total of  7.00  from holding West China Cement or generate 46.67% return on investment over 90 days.

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

Direct Line Insurance  vs.  West China Cement

Direct Line Insurance

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 10 (%) 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.

West China Cement

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in West China Cement are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, West China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and West China

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

The idea behind Direct Line Insurance and West China Cement 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.