Correlation Between Compass Group and Darden Restaurants

Can any of the company-specific risk be diversified away by investing in both Compass Group and Darden Restaurants 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 Compass Group and Darden Restaurants into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Compass Group PLC and Darden Restaurants, you can compare the effects of market volatilities on Compass Group and Darden Restaurants 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 Compass Group with a short position of Darden Restaurants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Compass Group and Darden Restaurants.

Diversification Opportunities for Compass Group and Darden Restaurants

0.68

Correlation Coefficient

Compass Group  Darden Restaurants

Poor diversification

The 3 months correlation between Compass and Darden is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Compass Group PLC and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants and Compass Group 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 Compass Group PLC are associated (or correlated) with Darden Restaurants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Darden Restaurants has no effect on the direction of Compass Group i.e., Compass Group and Darden Restaurants go up and down completely randomly.

Pair Corralation between Compass Group and Darden Restaurants

Assuming the 90 days horizon Compass Group is expected to generate 2.99 times less return on investment than Darden Restaurants. But when comparing it to its historical volatility, Compass Group PLC is 2.13 times less risky than Darden Restaurants. It trades about 0.19 of its potential returns per unit of risk. Darden Restaurants is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  15,877  in Darden Restaurants on September 3, 2024 and sell it today you would earn a total of  1,750  from holding Darden Restaurants or generate 11.02% return on investment over 90 days.

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

Compass Group PLC  vs.  Darden Restaurants

Compass Group PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Compass Group PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Compass Group may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Darden Restaurants

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Darden Restaurants are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating basic indicators, Darden Restaurants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Compass Group and Darden Restaurants

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

The idea behind Compass Group PLC and Darden Restaurants 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.