Correlation Between Direct Line and United Airlines
Can any of the company-specific risk be diversified away by investing in both Direct Line and United Airlines 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 United Airlines 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 United Airlines Holdings, you can compare the effects of market volatilities on Direct Line and United Airlines 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 United Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Direct Line and United Airlines.
Diversification Opportunities for Direct Line and United Airlines
-0.08 | Correlation Coefficient |
Good diversification
The 3 months correlation between Direct and United is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and United Airlines Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Airlines Holdings 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 United Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Airlines Holdings has no effect on the direction of Direct Line i.e., Direct Line and United Airlines go up and down completely randomly.
Pair Corralation between Direct Line and United Airlines
Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 1.01 times more return on investment than United Airlines. However, Direct Line is 1.01 times more volatile than United Airlines Holdings. It trades about 0.21 of its potential returns per unit of risk. United Airlines Holdings is currently generating about -0.04 per unit of risk. If you would invest 187.00 in Direct Line Insurance on December 12, 2024 and sell it today you would earn a total of 141.00 from holding Direct Line Insurance or generate 75.4% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Direct Line Insurance vs. United Airlines Holdings
Performance |
| Timeline |
| Direct Line Insurance |
| United Airlines Holdings |
Direct Line and United Airlines Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Direct Line and United Airlines
The main advantage of trading using opposite Direct Line and United Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Direct Line position performs unexpectedly, United Airlines 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 Airlines will offset losses from the drop in United Airlines' long position.| Direct Line vs. AEGEAN AIRLINES | ||
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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.
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