Correlation Between McDonalds and Starbucks

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

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

Diversification Opportunities for McDonalds and Starbucks

0.8

Correlation Coefficient

McDonalds  Starbucks

Very poor diversification

The 3 months correlation between McDonalds and Starbucks is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Starbucks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Starbucks 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 Starbucks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Starbucks has no effect on the direction of McDonalds i.e., McDonalds and Starbucks go up and down completely randomly.

Pair Corralation between McDonalds and Starbucks

Considering the 90-day investment horizon McDonalds is expected to generate 0.95 times more return on investment than Starbucks. However, McDonalds is 1.05 times less risky than Starbucks. It trades about -0.27 of its potential returns per unit of risk. Starbucks is currently generating about -0.31 per unit of risk. If you would invest  28,445  in McDonalds on January 20, 2024 and sell it today you would lose (1,347) from holding McDonalds or give up 4.74% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

McDonalds  vs.  Starbucks

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.

Starbucks

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Starbucks has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Starbucks is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with McDonalds and Starbucks

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

The idea behind McDonalds and Starbucks 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.