Correlation Between Sparebank and Discover Financial

Can any of the company-specific risk be diversified away by investing in both Sparebank and Discover Financial 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 Sparebank and Discover Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Sparebank 1 SR and Discover Financial Services, you can compare the effects of market volatilities on Sparebank and Discover Financial 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 Sparebank with a short position of Discover Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sparebank and Discover Financial.

Diversification Opportunities for Sparebank and Discover Financial

-0.01

Correlation Coefficient

Sparebank  Discover Financial

Good diversification

The 3 months correlation between Sparebank and Discover is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Sparebank 1 SR and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and Sparebank 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 Sparebank 1 SR are associated (or correlated) with Discover Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Discover Financial has no effect on the direction of Sparebank i.e., Sparebank and Discover Financial go up and down completely randomly.

Pair Corralation between Sparebank and Discover Financial

Assuming the 90 days trading horizon Sparebank 1 SR is expected to generate 0.32 times more return on investment than Discover Financial. However, Sparebank 1 SR is 3.14 times less risky than Discover Financial. It trades about 0.29 of its potential returns per unit of risk. Discover Financial Services is currently generating about 0.0 per unit of risk. If you would invest  14,500  in Sparebank 1 SR on December 26, 2024 and sell it today you would earn a total of  2,600  from holding Sparebank 1 SR or generate 17.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	93.65%
Values	Daily Returns

Sparebank 1 SR  vs.  Discover Financial Services

Sparebank 1 SR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sparebank 1 SR are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Sparebank unveiled solid returns over the last few months and may actually be approaching a breakup point.

Discover Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Discover Financial Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Discover Financial is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Sparebank and Discover Financial

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

The idea behind Sparebank 1 SR and Discover Financial Services 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.