Correlation Between Discover Financial and Volkswagen

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

Diversification Opportunities for Discover Financial and Volkswagen

-0.78

Correlation Coefficient

Discover Financial  Volkswagen

Pay attention - limited upside

The 3 months correlation between Discover and Volkswagen is -0.78. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Volkswagen AG VZO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG VZO 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 Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG VZO has no effect on the direction of Discover Financial i.e., Discover Financial and Volkswagen go up and down completely randomly.

Pair Corralation between Discover Financial and Volkswagen

Assuming the 90 days horizon Discover Financial is expected to generate 43.56 times less return on investment than Volkswagen. But when comparing it to its historical volatility, Discover Financial Services is 1.06 times less risky than Volkswagen. It trades about 0.01 of its potential returns per unit of risk. Volkswagen AG VZO is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  8,434  in Volkswagen AG VZO on October 10, 2024 and sell it today you would earn a total of  544.00  from holding Volkswagen AG VZO or generate 6.45% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	94.44%
Values	Daily Returns

Discover Financial Services  vs.  Volkswagen AG VZO

Discover Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Discover Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Volkswagen AG VZO

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volkswagen AG VZO has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Volkswagen is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Discover Financial and Volkswagen

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

The idea behind Discover Financial Services and Volkswagen AG VZO 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.