Correlation Between Direct Line and Universal Health

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

Diversification Opportunities for Direct Line and Universal Health

0.68

Correlation Coefficient

Direct Line  Universal Health

Poor diversification

The 3 months correlation between Direct and Universal is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Universal Health Realty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Universal Health Realty 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 Universal Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Universal Health Realty has no effect on the direction of Direct Line i.e., Direct Line and Universal Health go up and down completely randomly.

Pair Corralation between Direct Line and Universal Health

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 0.6 times more return on investment than Universal Health. However, Direct Line Insurance is 1.67 times less risky than Universal Health. It trades about 0.32 of its potential returns per unit of risk. Universal Health Realty is currently generating about 0.05 per unit of risk. If you would invest  318.00  in Direct Line Insurance on April 21, 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	Significant
Accuracy	79.69%
Values	Daily Returns

Direct Line Insurance  vs.  Universal Health Realty

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.

Universal Health Realty

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Universal Health Realty are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Universal Health is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Direct Line and Universal Health

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

The idea behind Direct Line Insurance and Universal Health Realty 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.