Correlation Between Discover Financial and Taiwan Semiconductor

Can any of the company-specific risk be diversified away by investing in both Discover Financial and Taiwan Semiconductor 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 Taiwan Semiconductor 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 Taiwan Semiconductor Manufacturing, you can compare the effects of market volatilities on Discover Financial and Taiwan Semiconductor 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 Taiwan Semiconductor. Check out your portfolio center. Please also check ongoing floating volatility patterns of Discover Financial and Taiwan Semiconductor.

Diversification Opportunities for Discover Financial and Taiwan Semiconductor

0.4

Correlation Coefficient

Discover Financial  Taiwan Semiconductor

Very weak diversification

The 3 months correlation between Discover and Taiwan is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor 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 Taiwan Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Semiconductor has no effect on the direction of Discover Financial i.e., Discover Financial and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between Discover Financial and Taiwan Semiconductor

Assuming the 90 days trading horizon Discover Financial Services is expected to generate 1.06 times more return on investment than Taiwan Semiconductor. However, Discover Financial is 1.06 times more volatile than Taiwan Semiconductor Manufacturing. It trades about 0.12 of its potential returns per unit of risk. Taiwan Semiconductor Manufacturing is currently generating about 0.1 per unit of risk. If you would invest  14,269  in Discover Financial Services on September 19, 2024 and sell it today you would earn a total of  3,001  from holding Discover Financial Services or generate 21.03% return on investment over 90 days.

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

Discover Financial Services  vs.  Taiwan Semiconductor Manufactu

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 uncertain basic indicators, Discover Financial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Taiwan Semiconductor

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Taiwan Semiconductor Manufacturing are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Taiwan Semiconductor disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Discover Financial and Taiwan Semiconductor

The main advantage of trading using opposite Discover Financial and Taiwan Semiconductor positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Discover Financial position performs unexpectedly, Taiwan Semiconductor 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 Taiwan Semiconductor will offset losses from the drop in Taiwan Semiconductor's long position.

The idea behind Discover Financial Services and Taiwan Semiconductor Manufacturing 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.