Correlation Between Pentair Plc and Discover Financial

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

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

Diversification Opportunities for Pentair Plc and Discover Financial

0.85

Correlation Coefficient

Pentair Plc  Discover Financial

Very poor diversification

The 3 months correlation between Pentair and Discover is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Pentair plc and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and Pentair Plc 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 Pentair plc 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 Pentair Plc i.e., Pentair Plc and Discover Financial go up and down completely randomly.

Pair Corralation between Pentair Plc and Discover Financial

Assuming the 90 days horizon Pentair Plc is expected to generate 3.72 times less return on investment than Discover Financial. But when comparing it to its historical volatility, Pentair plc is 2.17 times less risky than Discover Financial. It trades about 0.1 of its potential returns per unit of risk. Discover Financial Services is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  13,551  in Discover Financial Services on October 21, 2024 and sell it today you would earn a total of  4,591  from holding Discover Financial Services or generate 33.88% return on investment over 90 days.

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

Pentair plc  vs.  Discover Financial Services

Pentair plc

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Pentair plc are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Pentair Plc may actually be approaching a critical reversion point that can send shares even higher in February 2025.

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 Pentair Plc and Discover Financial

The main advantage of trading using opposite Pentair Plc and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Pentair Plc 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 Pentair plc 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.