Correlation Between GM and Discover Financial

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

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

Diversification Opportunities for GM and Discover Financial

-0.11

Correlation Coefficient

GM  Discover Financial

Good diversification

The 3 months correlation between GM and Discover is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and GM 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 General Motors 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 GM i.e., GM and Discover Financial go up and down completely randomly.

Pair Corralation between GM and Discover Financial

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.95 times more return on investment than Discover Financial. However, General Motors is 1.05 times less risky than Discover Financial. It trades about -0.03 of its potential returns per unit of risk. Discover Financial Services is currently generating about -0.03 per unit of risk. If you would invest  5,414  in General Motors on December 27, 2024 and sell it today you would lose (319.00) from holding General Motors or give up 5.89% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

General Motors  vs.  Discover Financial Services

General Motors

Risk-Adjusted Performance

Very Weak

Over the last 90 days General Motors has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, GM is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

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. Despite nearly stable basic indicators, Discover Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with GM and Discover Financial

The main advantage of trading using opposite GM and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM 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 General Motors 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.