Correlation Between Discover Financial and BAE Systems

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

Diversification Opportunities for Discover Financial and BAE Systems

-0.1

Correlation Coefficient

Discover Financial  BAE Systems

Good diversification

The 3 months correlation between Discover and BAE is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and BAE Systems plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BAE Systems plc 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 BAE Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BAE Systems plc has no effect on the direction of Discover Financial i.e., Discover Financial and BAE Systems go up and down completely randomly.

Pair Corralation between Discover Financial and BAE Systems

Assuming the 90 days trading horizon Discover Financial Services is expected to generate 1.6 times more return on investment than BAE Systems. However, Discover Financial is 1.6 times more volatile than BAE Systems plc. It trades about 0.16 of its potential returns per unit of risk. BAE Systems plc is currently generating about -0.05 per unit of risk. If you would invest  13,706  in Discover Financial Services on September 26, 2024 and sell it today you would earn a total of  3,931  from holding Discover Financial Services or generate 28.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Discover Financial Services  vs.  BAE Systems plc

Discover Financial

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 12 (%) 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.

BAE Systems plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, BAE Systems is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Discover Financial and BAE Systems

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

The idea behind Discover Financial Services and BAE Systems plc 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.