Correlation Between Yum China and Darden Restaurants

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

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

Diversification Opportunities for Yum China and Darden Restaurants

0.4

Correlation Coefficient

Yum China  Darden Restaurants

Very weak diversification

The 3 months correlation between Yum and Darden is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Yum China Holdings and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants and Yum China 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 Yum China Holdings 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 Yum China i.e., Yum China and Darden Restaurants go up and down completely randomly.

Pair Corralation between Yum China and Darden Restaurants

Assuming the 90 days horizon Yum China Holdings is expected to under-perform the Darden Restaurants. In addition to that, Yum China is 1.57 times more volatile than Darden Restaurants. It trades about 0.0 of its total potential returns per unit of risk. Darden Restaurants is currently generating about 0.05 per unit of volatility. If you would invest  12,604  in Darden Restaurants on October 10, 2024 and sell it today you would earn a total of  5,351  from holding Darden Restaurants or generate 42.45% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.8%
Values	Daily Returns

Yum China Holdings  vs.  Darden Restaurants

Yum China Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Yum China Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Yum China is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Darden Restaurants

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Darden Restaurants are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Darden Restaurants reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Yum China and Darden Restaurants

The main advantage of trading using opposite Yum China and Darden Restaurants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Yum China 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 Yum China Holdings 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.