Correlation Between GMS and Discover Financial

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

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

Diversification Opportunities for GMS and Discover Financial

0.44

Correlation Coefficient

GMS  Discover Financial

Very weak diversification

The 3 months correlation between GMS and Discover is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding GMS Inc and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and GMS 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 GMS Inc 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 GMS i.e., GMS and Discover Financial go up and down completely randomly.

Pair Corralation between GMS and Discover Financial

Considering the 90-day investment horizon GMS Inc is expected to under-perform the Discover Financial. In addition to that, GMS is 1.02 times more volatile than Discover Financial Services. It trades about -0.25 of its total potential returns per unit of risk. Discover Financial Services is currently generating about -0.04 per unit of volatility. If you would invest  18,181  in Discover Financial Services on October 7, 2024 and sell it today you would lose (575.00) from holding Discover Financial Services or give up 3.16% of portfolio value over 90 days.

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

GMS Inc  vs.  Discover Financial Services

GMS Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days GMS Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's primary indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Discover Financial

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 9 (%) 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.

Pair Trading with GMS and Discover Financial

The main advantage of trading using opposite GMS and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GMS 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 GMS Inc 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.