Correlation Between Yum Brands and Yum China

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

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

Diversification Opportunities for Yum Brands and Yum China

0.75

Correlation Coefficient

Yum Brands  Yum China

Poor diversification

The 3 months correlation between Yum and Yum is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Yum Brands and Yum China Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yum China Holdings and Yum Brands 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 Yum Brands are associated (or correlated) with Yum China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yum China Holdings has no effect on the direction of Yum Brands i.e., Yum Brands and Yum China go up and down completely randomly.

Pair Corralation between Yum Brands and Yum China

Assuming the 90 days horizon Yum Brands is expected to generate 5.63 times less return on investment than Yum China. But when comparing it to its historical volatility, Yum Brands is 2.55 times less risky than Yum China. It trades about 0.09 of its potential returns per unit of risk. Yum China Holdings is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  3,176  in Yum China Holdings on September 23, 2024 and sell it today you would earn a total of  1,475  from holding Yum China Holdings or generate 46.44% return on investment over 90 days.

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

Yum Brands  vs.  Yum China Holdings

Yum Brands

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Yum Brands may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Yum China Holdings

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Yum China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Yum Brands and Yum China

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

The idea behind Yum Brands and Yum China Holdings 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.