Correlation Between Darden Restaurants and Cisco Systems

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

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

Diversification Opportunities for Darden Restaurants and Cisco Systems

0.72

Correlation Coefficient

Darden Restaurants  Cisco Systems

Poor diversification

The 3 months correlation between Darden and Cisco is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Darden Restaurants and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of Darden Restaurants i.e., Darden Restaurants and Cisco Systems go up and down completely randomly.

Pair Corralation between Darden Restaurants and Cisco Systems

Assuming the 90 days trading horizon Darden Restaurants is expected to under-perform the Cisco Systems. In addition to that, Darden Restaurants is 1.02 times more volatile than Cisco Systems. It trades about -0.04 of its total potential returns per unit of risk. Cisco Systems is currently generating about -0.01 per unit of volatility. If you would invest  5,572  in Cisco Systems on December 21, 2024 and sell it today you would lose (87.00) from holding Cisco Systems or give up 1.56% of portfolio value over 90 days.

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

Darden Restaurants  vs.  Cisco Systems

Darden Restaurants

Risk-Adjusted Performance

Very Weak

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 stable basic indicators, Darden Restaurants is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Cisco Systems

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Darden Restaurants and Cisco Systems

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

The idea behind Darden Restaurants and Cisco Systems 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.