Correlation Between Discover Financial and Iron Road

Can any of the company-specific risk be diversified away by investing in both Discover Financial and Iron Road 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 Iron Road 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 Iron Road Limited, you can compare the effects of market volatilities on Discover Financial and Iron Road 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 Iron Road. Check out your portfolio center. Please also check ongoing floating volatility patterns of Discover Financial and Iron Road.

Diversification Opportunities for Discover Financial and Iron Road

-0.57

Correlation Coefficient

Discover Financial  Iron Road

Excellent diversification

The 3 months correlation between Discover and Iron is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Iron Road Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Iron Road Limited 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 Iron Road. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Iron Road Limited has no effect on the direction of Discover Financial i.e., Discover Financial and Iron Road go up and down completely randomly.

Pair Corralation between Discover Financial and Iron Road

Assuming the 90 days horizon Discover Financial Services is expected to generate 0.41 times more return on investment than Iron Road. However, Discover Financial Services is 2.44 times less risky than Iron Road. It trades about 0.19 of its potential returns per unit of risk. Iron Road Limited is currently generating about -0.02 per unit of risk. If you would invest  13,281  in Discover Financial Services on October 25, 2024 and sell it today you would earn a total of  4,851  from holding Discover Financial Services or generate 36.53% return on investment over 90 days.

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

Discover Financial Services  vs.  Iron Road Limited

Discover Financial

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Discover Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Iron Road Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Iron Road Limited 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 Discover Financial and Iron Road

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

The idea behind Discover Financial Services and Iron Road Limited 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.

Check out your portfolio center.

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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.