Correlation Between Discover Financial and East West

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

Diversification Opportunities for Discover Financial and East West

0.67

Correlation Coefficient

Discover Financial  East West

Poor diversification

The 3 months correlation between Discover and East is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and East West Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on East West Bancorp 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 East West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of East West Bancorp has no effect on the direction of Discover Financial i.e., Discover Financial and East West go up and down completely randomly.

Pair Corralation between Discover Financial and East West

Considering the 90-day investment horizon Discover Financial Services is expected to generate 1.46 times more return on investment than East West. However, Discover Financial is 1.46 times more volatile than East West Bancorp. It trades about 0.3 of its potential returns per unit of risk. East West Bancorp is currently generating about 0.19 per unit of risk. If you would invest  17,451  in Discover Financial Services on October 24, 2024 and sell it today you would earn a total of  2,045  from holding Discover Financial Services or generate 11.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	94.74%
Values	Daily Returns

Discover Financial Services  vs.  East West Bancorp

Discover Financial

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Discover Financial unveiled solid returns over the last few months and may actually be approaching a breakup point.

East West Bancorp

Risk-Adjusted Performance

3 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in East West Bancorp are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental drivers, East West is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Discover Financial and East West

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

The idea behind Discover Financial Services and East West Bancorp 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.