Correlation Between Discover Financial and PayPal Holdings

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

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

Diversification Opportunities for Discover Financial and PayPal Holdings

0.07

Correlation Coefficient

Discover Financial  PayPal Holdings

Significant diversification

The 3 months correlation between Discover and PayPal is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and PayPal Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PayPal Holdings and Discover Financial 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 Discover Financial Services are associated (or correlated) with PayPal Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PayPal Holdings has no effect on the direction of Discover Financial i.e., Discover Financial and PayPal Holdings go up and down completely randomly.

Pair Corralation between Discover Financial and PayPal Holdings

Assuming the 90 days trading horizon Discover Financial Services is expected to generate 1.63 times more return on investment than PayPal Holdings. However, Discover Financial is 1.63 times more volatile than PayPal Holdings. It trades about 0.07 of its potential returns per unit of risk. PayPal Holdings is currently generating about -0.2 per unit of risk. If you would invest  41,723  in Discover Financial Services on December 26, 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 Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Discover Financial Services  vs.  PayPal Holdings

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.

PayPal Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days PayPal Holdings 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 basic 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.

Pair Trading with Discover Financial and PayPal Holdings

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

The idea behind Discover Financial Services and PayPal Holdings 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.