Correlation Between McDonalds and Digital Brand

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

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

Diversification Opportunities for McDonalds and Digital Brand

-0.38

Correlation Coefficient

McDonalds  Digital Brand

Very good diversification

The 3 months correlation between McDonalds and Digital is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Digital Brand Media in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital Brand Media 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 Digital Brand. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital Brand Media has no effect on the direction of McDonalds i.e., McDonalds and Digital Brand go up and down completely randomly.

Pair Corralation between McDonalds and Digital Brand

Considering the 90-day investment horizon McDonalds is expected to under-perform the Digital Brand. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 8.51 times less risky than Digital Brand. The stock trades about -0.15 of its potential returns per unit of risk. The Digital Brand Media is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  0.63  in Digital Brand Media on February 3, 2024 and sell it today you would lose (0.10) from holding Digital Brand Media or give up 15.87% of portfolio value over 90 days.

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

McDonalds  vs.  Digital Brand Media

McDonalds

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days McDonalds has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Digital Brand Media

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Digital Brand Media are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, Digital Brand displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with McDonalds and Digital Brand

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

The idea behind McDonalds and Digital Brand Media 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.