Correlation Between Discover Financial and Capital One

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

Diversification Opportunities for Discover Financial and Capital One

0.82

Correlation Coefficient

Discover Financial  Capital One

Very poor diversification

The 3 months correlation between Discover and Capital is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Capital One Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital One Financial 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 Capital One. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital One Financial has no effect on the direction of Discover Financial i.e., Discover Financial and Capital One go up and down completely randomly.

Pair Corralation between Discover Financial and Capital One

Considering the 90-day investment horizon Discover Financial is expected to generate 1.61 times less return on investment than Capital One. But when comparing it to its historical volatility, Discover Financial Services is 1.15 times less risky than Capital One. It trades about 0.11 of its potential returns per unit of risk. Capital One Financial is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  14,055  in Capital One Financial on January 25, 2024 and sell it today you would earn a total of  735.00  from holding Capital One Financial or generate 5.23% 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.  Capital One Financial

Discover Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Discover Financial Services are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Discover Financial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Capital One Financial

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Capital One Financial are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Capital One may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Discover Financial and Capital One

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

The idea behind Discover Financial Services and Capital One Financial 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.