Correlation Between Broadcom and Discover Financial

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

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

Diversification Opportunities for Broadcom and Discover Financial

-0.22

Correlation Coefficient

Broadcom  Discover Financial

Very good diversification

The 3 months correlation between Broadcom and Discover is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and Broadcom 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 Broadcom 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 Broadcom i.e., Broadcom and Discover Financial go up and down completely randomly.

Pair Corralation between Broadcom and Discover Financial

Assuming the 90 days trading horizon Broadcom is expected to under-perform the Discover Financial. But the stock apears to be less risky and, when comparing its historical volatility, Broadcom is 1.18 times less risky than Discover Financial. The stock trades about -0.16 of its potential returns per unit of risk. The Discover Financial Services is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  41,723  in Discover Financial Services on December 27, 2024 and sell it today you would earn a total of  6,264  from holding Discover Financial Services or generate 15.01% return on investment over 90 days.

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

Broadcom  vs.  Discover Financial Services

Broadcom

Risk-Adjusted Performance

Very Weak

Over the last 90 days Broadcom has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Discover Financial

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Discover Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Broadcom and Discover Financial

The main advantage of trading using opposite Broadcom and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Broadcom 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 Broadcom 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.