Correlation Between Direct Line and ABN AMRO

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

Diversification Opportunities for Direct Line and ABN AMRO

0.85

Correlation Coefficient

Direct Line  ABN AMRO

Very poor diversification

The 3 months correlation between Direct and ABN is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and ABN AMRO Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABN AMRO 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 ABN AMRO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABN AMRO Bank has no effect on the direction of Direct Line i.e., Direct Line and ABN AMRO go up and down completely randomly.

Pair Corralation between Direct Line and ABN AMRO

Assuming the 90 days trading horizon Direct Line is expected to generate 2.21 times less return on investment than ABN AMRO. But when comparing it to its historical volatility, Direct Line Insurance is 1.99 times less risky than ABN AMRO. It trades about 0.32 of its potential returns per unit of risk. ABN AMRO Bank is currently generating about 0.36 of returns per unit of risk over similar time horizon. If you would invest  1,728  in ABN AMRO Bank on April 20, 2025 and sell it today you would earn a total of  684.00  from holding ABN AMRO Bank or generate 39.58% return on investment over 90 days.

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

Direct Line Insurance  vs.  ABN AMRO Bank

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.

ABN AMRO Bank

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in ABN AMRO Bank are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, ABN AMRO unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and ABN AMRO

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

The idea behind Direct Line Insurance and ABN AMRO 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.