Correlation Between Direct Line and Precision Drilling

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

Diversification Opportunities for Direct Line and Precision Drilling

0.66

Correlation Coefficient

Direct Line  Precision Drilling

Poor diversification

The 3 months correlation between Direct and Precision is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Precision Drilling in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Precision Drilling 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 Precision Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Precision Drilling has no effect on the direction of Direct Line i.e., Direct Line and Precision Drilling go up and down completely randomly.

Pair Corralation between Direct Line and Precision Drilling

Assuming the 90 days horizon Direct Line is expected to generate 1.41 times less return on investment than Precision Drilling. In addition to that, Direct Line is 1.23 times more volatile than Precision Drilling. It trades about 0.1 of its total potential returns per unit of risk. Precision Drilling is currently generating about 0.18 per unit of volatility. If you would invest  4,245  in Precision Drilling on May 20, 2025 and sell it today you would earn a total of  1,158  from holding Precision Drilling or generate 27.28% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	72.58%
Values	Daily Returns

Direct Line Insurance  vs.  Precision Drilling

Direct Line Insurance

Risk-Adjusted Performance

Fair

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 uncertain basic indicators, Direct Line showed solid returns over the last few months and may actually be approaching a breakup point.

Precision Drilling

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Precision Drilling are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating fundamental indicators, Precision Drilling unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Precision Drilling

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

The idea behind Direct Line Insurance and Precision Drilling 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.