Correlation Between Discover Financial and Verizon Communications

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

Diversification Opportunities for Discover Financial and Verizon Communications

-0.42

Correlation Coefficient

Discover Financial  Verizon Communications

Very good diversification

The 3 months correlation between Discover and Verizon is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Discover Financial i.e., Discover Financial and Verizon Communications go up and down completely randomly.

Pair Corralation between Discover Financial and Verizon Communications

Assuming the 90 days trading horizon Discover Financial Services is expected to generate 1.64 times more return on investment than Verizon Communications. However, Discover Financial is 1.64 times more volatile than Verizon Communications. It trades about 0.05 of its potential returns per unit of risk. Verizon Communications is currently generating about 0.01 per unit of risk. If you would invest  11,042  in Discover Financial Services on September 19, 2024 and sell it today you would earn a total of  6,323  from holding Discover Financial Services or generate 57.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	96.44%
Values	Daily Returns

Discover Financial Services  vs.  Verizon Communications

Discover Financial

Risk-Adjusted Performance

9 of 100

Good

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.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Verizon Communications is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Discover Financial and Verizon Communications

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

The idea behind Discover Financial Services and Verizon Communications 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.

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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.