Correlation Between Preferred Bank and Discover Financial

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

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

Diversification Opportunities for Preferred Bank and Discover Financial

0.83

Correlation Coefficient

Preferred Bank  Discover Financial

Very poor diversification

The 3 months correlation between Preferred and Discover is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Preferred Bank and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and Preferred Bank 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 Preferred Bank 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 Preferred Bank i.e., Preferred Bank and Discover Financial go up and down completely randomly.

Pair Corralation between Preferred Bank and Discover Financial

Assuming the 90 days horizon Preferred Bank is expected to generate 0.59 times more return on investment than Discover Financial. However, Preferred Bank is 1.71 times less risky than Discover Financial. It trades about -0.05 of its potential returns per unit of risk. Discover Financial Services is currently generating about -0.05 per unit of risk. If you would invest  8,175  in Preferred Bank on December 24, 2024 and sell it today you would lose (425.00) from holding Preferred Bank or give up 5.2% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Preferred Bank  vs.  Discover Financial Services

Preferred Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Preferred Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Preferred Bank is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

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. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Preferred Bank and Discover Financial

The main advantage of trading using opposite Preferred Bank and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Preferred Bank 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 Preferred Bank 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.