Correlation Between Direct Line and Guidewire Software

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

Diversification Opportunities for Direct Line and Guidewire Software

0.59

Correlation Coefficient

Direct Line  Guidewire Software

Very weak diversification

The 3 months correlation between Direct and Guidewire is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Guidewire Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guidewire Software 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 Guidewire Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guidewire Software has no effect on the direction of Direct Line i.e., Direct Line and Guidewire Software go up and down completely randomly.

Pair Corralation between Direct Line and Guidewire Software

Assuming the 90 days trading horizon Direct Line is expected to generate 1.34 times less return on investment than Guidewire Software. But when comparing it to its historical volatility, Direct Line Insurance is 3.6 times less risky than Guidewire Software. It trades about 0.32 of its potential returns per unit of risk. Guidewire Software is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  15,790  in Guidewire Software on April 20, 2025 and sell it today you would earn a total of  3,165  from holding Guidewire Software or generate 20.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	80.95%
Values	Daily Returns

Direct Line Insurance  vs.  Guidewire Software

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 fragile essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Guidewire Software

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Guidewire Software are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Guidewire Software unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Guidewire Software

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

The idea behind Direct Line Insurance and Guidewire Software 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.