Correlation Between East Japan and Discover Financial

Can any of the company-specific risk be diversified away by investing in both East Japan and Discover Financial 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 East Japan and Discover Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between East Japan Railway and Discover Financial Services, you can compare the effects of market volatilities on East Japan and Discover Financial 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 East Japan with a short position of Discover Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of East Japan and Discover Financial.

Diversification Opportunities for East Japan and Discover Financial

-0.36

Correlation Coefficient

East Japan  Discover Financial

Very good diversification

The 3 months correlation between East and Discover is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding East Japan Railway and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and East Japan 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 East Japan Railway are associated (or correlated) with Discover Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Discover Financial has no effect on the direction of East Japan i.e., East Japan and Discover Financial go up and down completely randomly.

Pair Corralation between East Japan and Discover Financial

Assuming the 90 days horizon East Japan is expected to generate 48.88 times less return on investment than Discover Financial. But when comparing it to its historical volatility, East Japan Railway is 1.36 times less risky than Discover Financial. It trades about 0.0 of its potential returns per unit of risk. Discover Financial Services is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  8,883  in Discover Financial Services on October 11, 2024 and sell it today you would earn a total of  8,103  from holding Discover Financial Services or generate 91.22% return on investment over 90 days.

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

East Japan Railway  vs.  Discover Financial Services

East Japan Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days East Japan Railway has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Discover Financial

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 14 (%) 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.

Pair Trading with East Japan and Discover Financial

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

The idea behind East Japan Railway and Discover Financial Services 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.