Correlation Between Direct Line and Darden Restaurants

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

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

Diversification Opportunities for Direct Line and Darden Restaurants

0.59

Correlation Coefficient

Direct Line  Darden Restaurants

Very weak diversification

The 3 months correlation between Direct and Darden is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Direct Line Insurance and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants and Direct Line 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 Direct Line Insurance 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 Direct Line i.e., Direct Line and Darden Restaurants go up and down completely randomly.

Pair Corralation between Direct Line and Darden Restaurants

Assuming the 90 days trading horizon Direct Line Insurance is expected to generate 2.26 times more return on investment than Darden Restaurants. However, Direct Line is 2.26 times more volatile than Darden Restaurants. It trades about 0.04 of its potential returns per unit of risk. Darden Restaurants is currently generating about 0.05 per unit of risk. If you would invest  199.00  in Direct Line Insurance on October 5, 2024 and sell it today you would earn a total of  108.00  from holding Direct Line Insurance or generate 54.27% return on investment over 90 days.

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

Direct Line Insurance  vs.  Darden Restaurants

Direct Line Insurance

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Direct Line Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile essential indicators, Direct Line reported solid returns over the last few months and may actually be approaching a breakup point.

Darden Restaurants

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Darden Restaurants has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly uncertain basic indicators, Darden Restaurants reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Direct Line and Darden Restaurants

The main advantage of trading using opposite Direct Line and Darden Restaurants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Direct Line 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 Direct Line Insurance 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.

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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.