Correlation Between McDonalds and Chipotle Mexican

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

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

Diversification Opportunities for McDonalds and Chipotle Mexican

0.22

Correlation Coefficient

McDonalds  Chipotle Mexican

Modest diversification

The 3 months correlation between McDonalds and Chipotle is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Chipotle Mexican Grill in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chipotle Mexican Grill 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 Chipotle Mexican. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chipotle Mexican Grill has no effect on the direction of McDonalds i.e., McDonalds and Chipotle Mexican go up and down completely randomly.

Pair Corralation between McDonalds and Chipotle Mexican

Considering the 90-day investment horizon McDonalds is expected to under-perform the Chipotle Mexican. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 2.02 times less risky than Chipotle Mexican. The stock trades about -0.01 of its potential returns per unit of risk. The Chipotle Mexican Grill is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  5,927  in Chipotle Mexican Grill on September 10, 2024 and sell it today you would earn a total of  613.00  from holding Chipotle Mexican Grill or generate 10.34% return on investment over 90 days.

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

McDonalds  vs.  Chipotle Mexican Grill

McDonalds

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. 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.

Chipotle Mexican Grill

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Chipotle Mexican Grill are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak primary indicators, Chipotle Mexican reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with McDonalds and Chipotle Mexican

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

The idea behind McDonalds and Chipotle Mexican Grill 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.