Correlation Between Darden Restaurants and McDonalds

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

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

Diversification Opportunities for Darden Restaurants and McDonalds

0.25

Correlation Coefficient

Darden Restaurants  McDonalds

Modest diversification

The 3 months correlation between Darden and McDonalds is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Darden Restaurants and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds 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 McDonalds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McDonalds has no effect on the direction of Darden Restaurants i.e., Darden Restaurants and McDonalds go up and down completely randomly.

Pair Corralation between Darden Restaurants and McDonalds

Assuming the 90 days horizon Darden Restaurants is expected to generate 5.39 times more return on investment than McDonalds. However, Darden Restaurants is 5.39 times more volatile than McDonalds. It trades about 0.19 of its potential returns per unit of risk. McDonalds is currently generating about -0.12 per unit of risk. If you would invest  16,005  in Darden Restaurants on October 10, 2024 and sell it today you would earn a total of  1,950  from holding Darden Restaurants or generate 12.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	94.44%
Values	Daily Returns

Darden Restaurants  vs.  McDonalds

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.

McDonalds

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, McDonalds is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Darden Restaurants and McDonalds

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

The idea behind Darden Restaurants and McDonalds 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.