Correlation Between Coca Cola and Direct Line

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

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

Diversification Opportunities for Coca Cola and Direct Line

0.54

Correlation Coefficient

Coca Cola  Direct Line

Very weak diversification

The 3 months correlation between Coca and Direct is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding The Coca Cola and Direct Line Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direct Line Insurance and Coca Cola 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 The Coca Cola are associated (or correlated) with Direct Line. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direct Line Insurance has no effect on the direction of Coca Cola i.e., Coca Cola and Direct Line go up and down completely randomly.

Pair Corralation between Coca Cola and Direct Line

Allowing for the 90-day total investment horizon The Coca Cola is expected to under-perform the Direct Line. But the stock apears to be less risky and, when comparing its historical volatility, The Coca Cola is 5.35 times less risky than Direct Line. The stock trades about -0.19 of its potential returns per unit of risk. The Direct Line Insurance is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  982.00  in Direct Line Insurance on September 5, 2024 and sell it today you would earn a total of  165.00  from holding Direct Line Insurance or generate 16.8% return on investment over 90 days.

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

The Coca Cola  vs.  Direct Line Insurance

Coca Cola

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Coca Cola has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Direct Line Insurance

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 5 (%) 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.

Pair Trading with Coca Cola and Direct Line

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

The idea behind The Coca Cola and Direct Line Insurance 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.