Correlation Between McDonalds and Tencent Holdings

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

By analyzing existing cross correlation between McDonalds and Tencent Holdings Ltd, you can compare the effects of market volatilities on McDonalds and Tencent Holdings 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 McDonalds with a short position of Tencent Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of McDonalds and Tencent Holdings.

Diversification Opportunities for McDonalds and Tencent Holdings

0.42

Correlation Coefficient

McDonalds  Tencent Holdings

Very weak diversification

The 3 months correlation between McDonalds and Tencent is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Tencent Holdings Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tencent Holdings and McDonalds 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 McDonalds are associated (or correlated) with Tencent Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tencent Holdings has no effect on the direction of McDonalds i.e., McDonalds and Tencent Holdings go up and down completely randomly.

Pair Corralation between McDonalds and Tencent Holdings

Considering the 90-day investment horizon McDonalds is expected to generate 0.44 times more return on investment than Tencent Holdings. However, McDonalds is 2.25 times less risky than Tencent Holdings. It trades about 0.15 of its potential returns per unit of risk. Tencent Holdings Ltd is currently generating about -0.01 per unit of risk. If you would invest  28,936  in McDonalds on September 19, 2024 and sell it today you would earn a total of  672.00  from holding McDonalds or generate 2.32% return on investment over 90 days.

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

McDonalds  vs.  Tencent Holdings Ltd

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. In spite of rather sound fundamental indicators, McDonalds is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Tencent Holdings

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Tencent Holdings Ltd are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical indicators, Tencent Holdings is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with McDonalds and Tencent Holdings

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

The idea behind McDonalds and Tencent Holdings Ltd 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.