Correlation Between CHINA BANK and Direct Line

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

By analyzing existing cross correlation between CHINA BANK ADR20 and Direct Line Insurance, you can compare the effects of market volatilities on CHINA BANK 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 CHINA BANK with a short position of Direct Line. Check out your portfolio center. Please also check ongoing floating volatility patterns of CHINA BANK and Direct Line.

Diversification Opportunities for CHINA BANK and Direct Line

0.86

Correlation Coefficient

CHINA BANK  Direct Line

Very poor diversification

The 3 months correlation between CHINA and Direct is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding CHINA BANK ADR20 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 CHINA BANK 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 CHINA BANK ADR20 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 CHINA BANK i.e., CHINA BANK and Direct Line go up and down completely randomly.

Pair Corralation between CHINA BANK and Direct Line

Assuming the 90 days trading horizon CHINA BANK ADR20 is expected to generate 2.36 times more return on investment than Direct Line. However, CHINA BANK is 2.36 times more volatile than Direct Line Insurance. It trades about 0.23 of its potential returns per unit of risk. Direct Line Insurance is currently generating about 0.32 per unit of risk. If you would invest  1,398  in CHINA BANK ADR20 on April 21, 2025 and sell it today you would earn a total of  402.00  from holding CHINA BANK ADR20 or generate 28.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	79.69%
Values	Daily Returns

CHINA BANK ADR20  vs.  Direct Line Insurance

CHINA BANK ADR20

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CHINA BANK ADR20 are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, CHINA BANK reported solid returns over the last few months and may actually be approaching a breakup point.

Direct Line Insurance

Risk-Adjusted Performance

Solid

Over the last 90 days Direct Line Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly uncertain essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CHINA BANK and Direct Line

The main advantage of trading using opposite CHINA BANK and Direct Line positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CHINA BANK 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 CHINA BANK ADR20 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.