Correlation Between Discover Financial and Commonwealth Bank

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

Diversification Opportunities for Discover Financial and Commonwealth Bank

0.83

Correlation Coefficient

Discover Financial  Commonwealth Bank

Very poor diversification

The 3 months correlation between Discover and Commonwealth is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Commonwealth Bank of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commonwealth Bank 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 Commonwealth Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Commonwealth Bank has no effect on the direction of Discover Financial i.e., Discover Financial and Commonwealth Bank go up and down completely randomly.

Pair Corralation between Discover Financial and Commonwealth Bank

Considering the 90-day investment horizon Discover Financial Services is expected to generate 1.75 times more return on investment than Commonwealth Bank. However, Discover Financial is 1.75 times more volatile than Commonwealth Bank of. It trades about -0.02 of its potential returns per unit of risk. Commonwealth Bank of is currently generating about -0.04 per unit of risk. If you would invest  17,391  in Discover Financial Services on December 22, 2024 and sell it today you would lose (908.00) from holding Discover Financial Services or give up 5.22% of portfolio value over 90 days.

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

Discover Financial Services  vs.  Commonwealth Bank of

Discover Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Discover Financial Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Discover Financial is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Commonwealth Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Commonwealth Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Commonwealth Bank is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Discover Financial and Commonwealth Bank

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

The idea behind Discover Financial Services and Commonwealth Bank of 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.