Correlation Between Visa and Discover Financial

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

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

Diversification Opportunities for Visa and Discover Financial

0.71

Correlation Coefficient

Visa  Discover Financial

Poor diversification

The 3 months correlation between Visa and Discover is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and Visa 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 Visa Class A 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 Visa i.e., Visa and Discover Financial go up and down completely randomly.

Pair Corralation between Visa and Discover Financial

Taking into account the 90-day investment horizon Visa is expected to generate 2.35 times less return on investment than Discover Financial. But when comparing it to its historical volatility, Visa Class A is 4.13 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 0.05 of returns per unit of risk over similar time horizon. If you would invest  41,723  in Discover Financial Services on December 21, 2024 and sell it today you would earn a total of  3,777  from holding Discover Financial Services or generate 9.05% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.67%
Values	Daily Returns

Visa Class A  vs.  Discover Financial Services

Visa Class A

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Visa may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Discover Financial

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Discover Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Visa and Discover Financial

The main advantage of trading using opposite Visa and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.