Correlation Between McDonalds and Dell Technologies

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

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

Diversification Opportunities for McDonalds and Dell Technologies

-0.7

Correlation Coefficient

McDonalds  Dell Technologies

Excellent diversification

The 3 months correlation between McDonalds and Dell is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Dell Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dell Technologies 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 Dell Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dell Technologies has no effect on the direction of McDonalds i.e., McDonalds and Dell Technologies go up and down completely randomly.

Pair Corralation between McDonalds and Dell Technologies

Considering the 90-day investment horizon McDonalds is expected to generate 6.97 times less return on investment than Dell Technologies. But when comparing it to its historical volatility, McDonalds is 3.55 times less risky than Dell Technologies. It trades about 0.16 of its potential returns per unit of risk. Dell Technologies is currently generating about 0.31 of returns per unit of risk over similar time horizon. If you would invest  12,061  in Dell Technologies on February 16, 2024 and sell it today you would earn a total of  2,855  from holding Dell Technologies or generate 23.67% return on investment over 90 days.

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

McDonalds  vs.  Dell Technologies

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.

Dell Technologies

Risk-Adjusted Performance

16 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Dell Technologies are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting essential indicators, Dell Technologies disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with McDonalds and Dell Technologies

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

The idea behind McDonalds and Dell Technologies 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.