Correlation Between Bright Horizons and Darden Restaurants

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

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

Diversification Opportunities for Bright Horizons and Darden Restaurants

0.43

Correlation Coefficient

Bright Horizons  Darden Restaurants

Very weak diversification

The 3 months correlation between Bright and Darden is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Bright Horizons Family and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants and Bright Horizons 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 Bright Horizons Family 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 Bright Horizons i.e., Bright Horizons and Darden Restaurants go up and down completely randomly.

Pair Corralation between Bright Horizons and Darden Restaurants

Given the investment horizon of 90 days Bright Horizons Family is expected to under-perform the Darden Restaurants. But the stock apears to be less risky and, when comparing its historical volatility, Bright Horizons Family is 1.04 times less risky than Darden Restaurants. The stock trades about -0.22 of its potential returns per unit of risk. The Darden Restaurants is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  16,214  in Darden Restaurants on January 26, 2024 and sell it today you would lose (553.00) from holding Darden Restaurants or give up 3.41% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

Bright Horizons Family  vs.  Darden Restaurants

Bright Horizons Family

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Bright Horizons Family are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Bright Horizons may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Darden Restaurants

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Darden Restaurants has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Darden Restaurants is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Bright Horizons and Darden Restaurants

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