Correlation Between Starbucks and McDonalds

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

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

Diversification Opportunities for Starbucks and McDonalds

0.86

Correlation Coefficient

Starbucks  McDonalds

Very poor diversification

The 3 months correlation between Starbucks and McDonalds is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Starbucks and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Starbucks 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 Starbucks are associated (or correlated) with McDonalds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McDonalds has no effect on the direction of Starbucks i.e., Starbucks and McDonalds go up and down completely randomly.

Pair Corralation between Starbucks and McDonalds

Given the investment horizon of 90 days Starbucks is expected to under-perform the McDonalds. In addition to that, Starbucks is 4.28 times more volatile than McDonalds. It trades about -0.23 of its total potential returns per unit of risk. McDonalds is currently generating about -0.06 per unit of volatility. If you would invest  27,774  in McDonalds on February 2, 2024 and sell it today you would lose (331.00) from holding McDonalds or give up 1.19% of portfolio value over 90 days.

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

Starbucks  vs.  McDonalds

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 fragile performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

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.

Pair Trading with Starbucks and McDonalds

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

The idea behind Starbucks and McDonalds 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.