Correlation Between Yum China and McDonalds

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

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

Diversification Opportunities for Yum China and McDonalds

0.42

Correlation Coefficient

Yum China  McDonalds

Very weak diversification

The 3 months correlation between Yum and McDonalds is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Yum China Holdings and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Yum China 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 China Holdings 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 China i.e., Yum China and McDonalds go up and down completely randomly.

Pair Corralation between Yum China and McDonalds

Given the investment horizon of 90 days Yum China Holdings is expected to generate 2.26 times more return on investment than McDonalds. However, Yum China is 2.26 times more volatile than McDonalds. It trades about 0.1 of its potential returns per unit of risk. McDonalds is currently generating about 0.09 per unit of risk. If you would invest  3,534  in Yum China Holdings on August 30, 2024 and sell it today you would earn a total of  1,144  from holding Yum China Holdings or generate 32.37% return on investment over 90 days.

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

Yum China Holdings  vs.  McDonalds

Yum China Holdings

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent primary indicators, Yum China exhibited solid returns over the last few months and may actually be approaching a breakup point.

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 China and McDonalds

The main advantage of trading using opposite Yum China and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Yum China 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 China Holdings 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .