Correlation Between Direct Line and Cognizant Technology

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

Diversification Opportunities for Direct Line and Cognizant Technology

0.07

Correlation Coefficient

Direct Line  Cognizant Technology

Significant diversification

The 3 months correlation between Direct and Cognizant is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Cognizant Technology Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cognizant Technology 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 Cognizant Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cognizant Technology has no effect on the direction of Direct Line i.e., Direct Line and Cognizant Technology go up and down completely randomly.

Pair Corralation between Direct Line and Cognizant Technology

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 0.48 times more return on investment than Cognizant Technology. However, Direct Line Insurance is 2.1 times less risky than Cognizant Technology. It trades about 0.32 of its potential returns per unit of risk. Cognizant Technology Solutions is currently generating about 0.1 per unit of risk. If you would invest  318.00  in Direct Line Insurance on April 22, 2025 and sell it today you would earn a total of  41.00  from holding Direct Line Insurance or generate 12.89% return on investment over 90 days.

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

Direct Line Insurance  vs.  Cognizant Technology Solutions

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

Cognizant Technology

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cognizant Technology Solutions are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Cognizant Technology may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Direct Line and Cognizant Technology

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

The idea behind Direct Line Insurance and Cognizant Technology Solutions 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.

Check out your portfolio center.

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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.