Correlation Between DAX Index and Discover Financial

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

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

Diversification Opportunities for DAX Index and Discover Financial

0.51

Correlation Coefficient

DAX Index  Discover Financial

Very weak diversification

The 3 months correlation between DAX and Discover is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding DAX Index and Discover Financial Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Discover Financial and DAX Index 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 DAX Index 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 DAX Index i.e., DAX Index and Discover Financial go up and down completely randomly.

Pair Corralation between DAX Index and Discover Financial

Assuming the 90 days trading horizon DAX Index is expected to generate 6.01 times less return on investment than Discover Financial. But when comparing it to its historical volatility, DAX Index is 3.72 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 0.15 of returns per unit of risk over similar time horizon. If you would invest  12,486  in Discover Financial Services on September 24, 2024 and sell it today you would earn a total of  3,710  from holding Discover Financial Services or generate 29.71% return on investment over 90 days.

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

DAX Index  vs.  Discover Financial Services

Pair Trading with DAX Index and Discover Financial

The main advantage of trading using opposite DAX Index and Discover Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DAX Index 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 DAX Index 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.