Correlation Between Yum Brands and Starbucks

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

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

Diversification Opportunities for Yum Brands and Starbucks

0.31

Correlation Coefficient

Yum Brands  Starbucks

Weak diversification

The 3 months correlation between Yum and Starbucks is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Yum Brands and Starbucks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Starbucks 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 Starbucks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Starbucks has no effect on the direction of Yum Brands i.e., Yum Brands and Starbucks go up and down completely randomly.

Pair Corralation between Yum Brands and Starbucks

Considering the 90-day investment horizon Yum Brands is expected to generate 0.75 times more return on investment than Starbucks. However, Yum Brands is 1.33 times less risky than Starbucks. It trades about 0.27 of its potential returns per unit of risk. Starbucks is currently generating about 0.19 per unit of risk. If you would invest  13,116  in Yum Brands on September 1, 2024 and sell it today you would earn a total of  778.00  from holding Yum Brands or generate 5.93% return on investment over 90 days.

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

Yum Brands  vs.  Starbucks

Yum Brands

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 5 (%) 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 recent stock price disarray, may contribute to short-term losses for the investors.

Starbucks

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Starbucks are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Starbucks may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Yum Brands and Starbucks

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

The idea behind Yum Brands and Starbucks 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.