Correlation Between Darden Restaurants and Yum China

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

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

Diversification Opportunities for Darden Restaurants and Yum China

0.37

Correlation Coefficient

Darden Restaurants  Yum China

Weak diversification

The 3 months correlation between Darden and Yum is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding Darden Restaurants and Yum China Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yum China Holdings and Darden Restaurants 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 Darden Restaurants are associated (or correlated) with Yum China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yum China Holdings has no effect on the direction of Darden Restaurants i.e., Darden Restaurants and Yum China go up and down completely randomly.

Pair Corralation between Darden Restaurants and Yum China

Assuming the 90 days horizon Darden Restaurants is expected to generate 2.39 times less return on investment than Yum China. But when comparing it to its historical volatility, Darden Restaurants is 1.19 times less risky than Yum China. It trades about 0.1 of its potential returns per unit of risk. Yum China Holdings is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  3,176  in Yum China Holdings on September 23, 2024 and sell it today you would earn a total of  1,475  from holding Yum China Holdings or generate 46.44% return on investment over 90 days.

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

Darden Restaurants  vs.  Yum China Holdings

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 nearly fragile basic indicators, Darden Restaurants reported solid returns over the last few months and may actually be approaching a breakup point.

Yum China Holdings

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Yum China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Darden Restaurants and Yum China

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

The idea behind Darden Restaurants and Yum China 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.

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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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.