Correlation Between McDonalds and Cisco Systems

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

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

Diversification Opportunities for McDonalds and Cisco Systems

0.37

Correlation Coefficient

McDonalds  Cisco Systems

Weak diversification

The 3 months correlation between McDonalds and Cisco is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of McDonalds i.e., McDonalds and Cisco Systems go up and down completely randomly.

Pair Corralation between McDonalds and Cisco Systems

Considering the 90-day investment horizon McDonalds is expected to generate 0.97 times more return on investment than Cisco Systems. However, McDonalds is 1.03 times less risky than Cisco Systems. It trades about -0.07 of its potential returns per unit of risk. Cisco Systems is currently generating about -0.1 per unit of risk. If you would invest  29,061  in McDonalds on January 26, 2024 and sell it today you would lose (1,386) from holding McDonalds or give up 4.77% of portfolio value over 90 days.

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

McDonalds  vs.  Cisco Systems

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.

Cisco Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cisco Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with McDonalds and Cisco Systems

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

The idea behind McDonalds and Cisco Systems 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.

Check out your portfolio center.

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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.