Correlation Between General Insurance and United Drilling

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

By analyzing existing cross correlation between General Insurance and United Drilling Tools, you can compare the effects of market volatilities on General Insurance and United Drilling 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 General Insurance with a short position of United Drilling. Check out your portfolio center. Please also check ongoing floating volatility patterns of General Insurance and United Drilling.

Diversification Opportunities for General Insurance and United Drilling

0.47

Correlation Coefficient

General Insurance  United Drilling

Very weak diversification

The 3 months correlation between General and United is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding General Insurance and United Drilling Tools in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Drilling Tools and General Insurance 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 General Insurance are associated (or correlated) with United Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Drilling Tools has no effect on the direction of General Insurance i.e., General Insurance and United Drilling go up and down completely randomly.

Pair Corralation between General Insurance and United Drilling

Assuming the 90 days trading horizon General Insurance is expected to generate 0.98 times more return on investment than United Drilling. However, General Insurance is 1.02 times less risky than United Drilling. It trades about 0.04 of its potential returns per unit of risk. United Drilling Tools is currently generating about -0.02 per unit of risk. If you would invest  38,782  in General Insurance on September 4, 2024 and sell it today you would earn a total of  1,528  from holding General Insurance or generate 3.94% return on investment over 90 days.

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

General Insurance  vs.  United Drilling Tools

General Insurance

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in General Insurance are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, General Insurance is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

United Drilling Tools

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days United Drilling Tools has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, United Drilling is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with General Insurance and United Drilling

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

The idea behind General Insurance and United Drilling Tools 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.