Correlation Between Diageo PLC and Direct Line

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

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

Diversification Opportunities for Diageo PLC and Direct Line

-0.31

Correlation Coefficient

Diageo PLC  Direct Line

Very good diversification

The 3 months correlation between Diageo and Direct is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC ADR 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 Diageo PLC 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 Diageo PLC ADR 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 Diageo PLC i.e., Diageo PLC and Direct Line go up and down completely randomly.

Pair Corralation between Diageo PLC and Direct Line

Considering the 90-day investment horizon Diageo PLC ADR is expected to under-perform the Direct Line. But the stock apears to be less risky and, when comparing its historical volatility, Diageo PLC ADR is 1.87 times less risky than Direct Line. The stock trades about -0.29 of its potential returns per unit of risk. The Direct Line Insurance is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,034  in Direct Line Insurance on March 22, 2024 and sell it today you would lose (29.00) from holding Direct Line Insurance or give up 2.8% of portfolio value over 90 days.

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

Diageo PLC ADR  vs.  Direct Line Insurance

Diageo PLC ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's technical and fundamental 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

0 of 100

Very Weak

Over the last 90 days Direct Line Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Direct Line is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Diageo PLC and Direct Line

The main advantage of trading using opposite Diageo PLC and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diageo PLC 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 Diageo PLC ADR 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.