Correlation Between American Express and Discover Financial

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

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

Diversification Opportunities for American Express and Discover Financial

0.87

Correlation Coefficient

American Express  Discover Financial

Very poor diversification

The 3 months correlation between American and Discover is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding American Express and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and American Express 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 American Express 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 American Express i.e., American Express and Discover Financial go up and down completely randomly.

Pair Corralation between American Express and Discover Financial

Assuming the 90 days trading horizon American Express is expected to generate 0.66 times more return on investment than Discover Financial. However, American Express is 1.53 times less risky than Discover Financial. It trades about -0.3 of its potential returns per unit of risk. Discover Financial Services is currently generating about -0.24 per unit of risk. If you would invest  28,670  in American Express on December 30, 2024 and sell it today you would lose (4,205) from holding American Express or give up 14.67% of portfolio value over 90 days.

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

American Express  vs.  Discover Financial Services

American Express

Risk-Adjusted Performance

Very Weak

Over the last 90 days American Express has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's fundamental indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company 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 fragile 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 American Express and Discover Financial

The main advantage of trading using opposite American Express and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Express 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 American Express 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.