Correlation Between McDonalds and Yum Brands

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

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

Diversification Opportunities for McDonalds and Yum Brands

-0.34

Correlation Coefficient

McDonalds  Yum Brands

Very good diversification

The 3 months correlation between McDonalds and Yum is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Yum Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yum Brands 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 Yum Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yum Brands has no effect on the direction of McDonalds i.e., McDonalds and Yum Brands go up and down completely randomly.

Pair Corralation between McDonalds and Yum Brands

Considering the 90-day investment horizon McDonalds is expected to under-perform the Yum Brands. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 1.02 times less risky than Yum Brands. The stock trades about -0.03 of its potential returns per unit of risk. The Yum Brands is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  13,462  in Yum Brands on January 25, 2024 and sell it today you would earn a total of  719.00  from holding Yum Brands or generate 5.34% return on investment over 90 days.

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

McDonalds  vs.  Yum Brands

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.

Yum Brands

Risk-Adjusted Performance

12 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting basic indicators, Yum Brands may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with McDonalds and Yum Brands

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

The idea behind McDonalds and Yum Brands 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.