Correlation Between Discover Financial and DAX Index

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

Diversification Opportunities for Discover Financial and DAX Index

0.48

Correlation Coefficient

Discover Financial  DAX Index

Very weak diversification

The 3 months correlation between Discover and DAX is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and DAX Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DAX Index 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 DAX Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DAX Index has no effect on the direction of Discover Financial i.e., Discover Financial and DAX Index go up and down completely randomly.

Pair Corralation between Discover Financial and DAX Index

Assuming the 90 days horizon Discover Financial Services is expected to generate 2.81 times more return on investment than DAX Index. However, Discover Financial is 2.81 times more volatile than DAX Index. It trades about 0.01 of its potential returns per unit of risk. DAX Index is currently generating about -0.28 per unit of risk. If you would invest  16,892  in Discover Financial Services on October 8, 2024 and sell it today you would earn a total of  0.00  from holding Discover Financial Services or generate 0.0% return on investment over 90 days.

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

Discover Financial Services  vs.  DAX Index

Pair Trading with Discover Financial and DAX Index

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

The idea behind Discover Financial Services and DAX Index 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.