Correlation Between Discovery Holdings and City Lodge

Can any of the company-specific risk be diversified away by investing in both Discovery Holdings and City Lodge 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 Discovery Holdings and City Lodge into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Discovery Holdings and City Lodge Hotels, you can compare the effects of market volatilities on Discovery Holdings and City Lodge 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 Discovery Holdings with a short position of City Lodge. Check out your portfolio center. Please also check ongoing floating volatility patterns of Discovery Holdings and City Lodge.

Diversification Opportunities for Discovery Holdings and City Lodge

0.34

Correlation Coefficient

Discovery Holdings  City Lodge

Weak diversification

The 3 months correlation between Discovery and City is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Discovery Holdings and City Lodge Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on City Lodge Hotels and Discovery Holdings 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 Discovery Holdings are associated (or correlated) with City Lodge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of City Lodge Hotels has no effect on the direction of Discovery Holdings i.e., Discovery Holdings and City Lodge go up and down completely randomly.

Pair Corralation between Discovery Holdings and City Lodge

Assuming the 90 days trading horizon Discovery Holdings is expected to generate 0.87 times more return on investment than City Lodge. However, Discovery Holdings is 1.15 times less risky than City Lodge. It trades about 0.26 of its potential returns per unit of risk. City Lodge Hotels is currently generating about -0.06 per unit of risk. If you would invest  1,709,621  in Discovery Holdings on October 12, 2024 and sell it today you would earn a total of  255,779  from holding Discovery Holdings or generate 14.96% return on investment over 90 days.

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

Discovery Holdings  vs.  City Lodge Hotels

Discovery Holdings

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Discovery Holdings are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Discovery Holdings exhibited solid returns over the last few months and may actually be approaching a breakup point.

City Lodge Hotels

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days City Lodge Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, City Lodge is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Discovery Holdings and City Lodge

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

The idea behind Discovery Holdings and City Lodge Hotels 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.