Correlation Between Bank of Nova Scotia and Darden Restaurants

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

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

Diversification Opportunities for Bank of Nova Scotia and Darden Restaurants

0.72

Correlation Coefficient

Bank of Nova Scotia  Darden Restaurants

Poor diversification

The 3 months correlation between Bank and Darden is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding The Bank of and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants and Bank of Nova Scotia 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 The Bank of 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 Bank of Nova Scotia i.e., Bank of Nova Scotia and Darden Restaurants go up and down completely randomly.

Pair Corralation between Bank of Nova Scotia and Darden Restaurants

Assuming the 90 days horizon The Bank of is expected to under-perform the Darden Restaurants. But the stock apears to be less risky and, when comparing its historical volatility, The Bank of is 3.66 times less risky than Darden Restaurants. The stock trades about -0.07 of its potential returns per unit of risk. The Darden Restaurants is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  16,240  in Darden Restaurants on October 5, 2024 and sell it today you would earn a total of  1,620  from holding Darden Restaurants or generate 9.98% return on investment over 90 days.

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

The Bank of  vs.  Darden Restaurants

Bank of Nova Scotia

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days The Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Bank of Nova Scotia may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Darden Restaurants

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Darden Restaurants has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively fragile basic indicators, Darden Restaurants unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of Nova Scotia and Darden Restaurants

The main advantage of trading using opposite Bank of Nova Scotia and Darden Restaurants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of Nova Scotia 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 The Bank of 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..