Correlation Between Direct Line and Postal Savings

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

Diversification Opportunities for Direct Line and Postal Savings

0.8

Correlation Coefficient

Direct Line  Postal Savings

Very poor diversification

The 3 months correlation between Direct and Postal is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Postal Savings Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Postal Savings Bank 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 Postal Savings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Postal Savings Bank has no effect on the direction of Direct Line i.e., Direct Line and Postal Savings go up and down completely randomly.

Pair Corralation between Direct Line and Postal Savings

Assuming the 90 days trading horizon Direct Line is expected to generate 1.77 times less return on investment than Postal Savings. But when comparing it to its historical volatility, Direct Line Insurance is 2.37 times less risky than Postal Savings. It trades about 0.18 of its potential returns per unit of risk. Postal Savings Bank is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  54.00  in Postal Savings Bank on April 9, 2025 and sell it today you would earn a total of  5.00  from holding Postal Savings Bank or generate 9.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	92.86%
Values	Daily Returns

Direct Line Insurance  vs.  Postal Savings Bank

Direct Line Insurance

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Direct Line Insurance are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Postal Savings Bank

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Postal Savings Bank are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Postal Savings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Postal Savings

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

The idea behind Direct Line Insurance and Postal Savings Bank 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.