Correlation Between Discover Financial and Small Cap
Can any of the company-specific risk be diversified away by investing in both Discover Financial and Small Cap 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 Discover Financial and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Discover Financial Services and Small Cap Core, you can compare the effects of market volatilities on Discover Financial and Small Cap 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 Discover Financial with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Discover Financial and Small Cap.
Diversification Opportunities for Discover Financial and Small Cap
0.89 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Discover and Small is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Discover Financial 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 Discover Financial Services are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Core has no effect on the direction of Discover Financial i.e., Discover Financial and Small Cap go up and down completely randomly.
Pair Corralation between Discover Financial and Small Cap
Considering the 90-day investment horizon Discover Financial Services is expected to generate 2.81 times more return on investment than Small Cap. However, Discover Financial is 2.81 times more volatile than Small Cap Core. It trades about 0.2 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.19 per unit of risk. If you would invest 15,226 in Discover Financial Services on August 28, 2024 and sell it today you would earn a total of 3,041 from holding Discover Financial Services or generate 19.97% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Discover Financial Services vs. Small Cap Core
Performance |
| Timeline |
| Discover Financial |
| Small Cap Core |
Discover Financial and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Discover Financial and Small Cap
The main advantage of trading using opposite Discover Financial and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Discover Financial position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.| Discover Financial vs. SLM Corp | Discover Financial vs. Orix Corp Ads | Discover Financial vs. FirstCash | Discover Financial vs. Medallion Financial Corp |
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Check out your portfolio center.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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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