Correlation Between Yum Brands and McDonalds

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

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

Diversification Opportunities for Yum Brands and McDonalds

0.18

Correlation Coefficient

Yum Brands  McDonalds

Average diversification

The 3 months correlation between Yum and McDonalds is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Yum Brands and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds 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 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 Yum Brands i.e., Yum Brands and McDonalds go up and down completely randomly.

Pair Corralation between Yum Brands and McDonalds

Considering the 90-day investment horizon Yum Brands is expected to generate 1.01 times less return on investment than McDonalds. But when comparing it to its historical volatility, Yum Brands is 1.0 times less risky than McDonalds. It trades about 0.03 of its potential returns per unit of risk. McDonalds is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  26,127  in McDonalds on August 30, 2024 and sell it today you would earn a total of  3,381  from holding McDonalds or generate 12.94% return on investment over 90 days.

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

Yum Brands  vs.  McDonalds

Yum Brands

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Yum Brands is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

McDonalds

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 3 (%) 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.

Pair Trading with Yum Brands and McDonalds

The main advantage of trading using opposite Yum Brands and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Yum Brands 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 Yum Brands 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.