Correlation Between Service International and Direct Line

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

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

Diversification Opportunities for Service International and Direct Line

0.4

Correlation Coefficient

Service International  Direct Line

Very weak diversification

The 3 months correlation between Service and Direct is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Service International 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 Service International 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 Service International 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 Service International i.e., Service International and Direct Line go up and down completely randomly.

Pair Corralation between Service International and Direct Line

Considering the 90-day investment horizon Service International is expected to generate 3.99 times less return on investment than Direct Line. But when comparing it to its historical volatility, Service International is 2.6 times less risky than Direct Line. It trades about 0.09 of its potential returns per unit of risk. Direct Line Insurance is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,516  in Direct Line Insurance on May 11, 2025 and sell it today you would earn a total of  284.00  from holding Direct Line Insurance or generate 18.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	82.26%
Values	Daily Returns

Service International  vs.  Direct Line Insurance

Service International

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Service International are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong fundamental indicators, Service International is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

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.

Pair Trading with Service International and Direct Line

The main advantage of trading using opposite Service International and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Service International 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 Service International 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.