Correlation Between Discover Financial and Bread Financial

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

Diversification Opportunities for Discover Financial and Bread Financial

0.81

Correlation Coefficient

Discover Financial  Bread Financial

Very poor diversification

The 3 months correlation between Discover and Bread is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Discover Financial Services and Bread Financial Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bread Financial Holdings 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 Bread Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bread Financial Holdings has no effect on the direction of Discover Financial i.e., Discover Financial and Bread Financial go up and down completely randomly.

Pair Corralation between Discover Financial and Bread Financial

Considering the 90-day investment horizon Discover Financial Services is expected to generate 1.09 times more return on investment than Bread Financial. However, Discover Financial is 1.09 times more volatile than Bread Financial Holdings. It trades about -0.08 of its potential returns per unit of risk. Bread Financial Holdings is currently generating about -0.2 per unit of risk. If you would invest  17,859  in Discover Financial Services on January 5, 2025 and sell it today you would lose (3,155) from holding Discover Financial Services or give up 17.67% of portfolio value over 90 days.

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

Discover Financial Services  vs.  Bread Financial Holdings

Discover Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Discover Financial Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical and fundamental indicators remain comparatively stable which may send shares a bit higher in May 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Bread Financial Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Bread Financial Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unfluctuating performance in the last few months, the Stock's technical and fundamental indicators remain fairly strong which may send shares a bit higher in May 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Discover Financial and Bread Financial

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

The idea behind Discover Financial Services and Bread Financial Holdings 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.