Correlation Between McDonalds and Microsoft

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

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

Diversification Opportunities for McDonalds and Microsoft

-0.66

Correlation Coefficient

McDonalds  Microsoft

Excellent diversification

The 3 months correlation between McDonalds and Microsoft is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft 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 Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of McDonalds i.e., McDonalds and Microsoft go up and down completely randomly.

Pair Corralation between McDonalds and Microsoft

Considering the 90-day investment horizon McDonalds is expected to generate 3.42 times less return on investment than Microsoft. But when comparing it to its historical volatility, McDonalds is 1.73 times less risky than Microsoft. It trades about 0.03 of its potential returns per unit of risk. Microsoft is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  28,448  in Microsoft on January 18, 2024 and sell it today you would earn a total of  12,736  from holding Microsoft or generate 44.77% return on investment over 90 days.

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

McDonalds  vs.  Microsoft

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 latest fragile performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Microsoft

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with McDonalds and Microsoft

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

The idea behind McDonalds and Microsoft 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.