Correlation Between McDonalds and Small-cap Value

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

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

Diversification Opportunities for McDonalds and Small-cap Value

-0.65

Correlation Coefficient

McDonalds  Small-cap Value

Excellent diversification

The 3 months correlation between McDonalds and Small-cap is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Small Cap Value Series in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value 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 Small-cap Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Value has no effect on the direction of McDonalds i.e., McDonalds and Small-cap Value go up and down completely randomly.

Pair Corralation between McDonalds and Small-cap Value

Considering the 90-day investment horizon McDonalds is expected to under-perform the Small-cap Value. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 1.15 times less risky than Small-cap Value. The stock trades about -0.06 of its potential returns per unit of risk. The Small Cap Value Series is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  1,211  in Small Cap Value Series on May 5, 2025 and sell it today you would earn a total of  88.00  from holding Small Cap Value Series or generate 7.27% return on investment over 90 days.

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

McDonalds  vs.  Small Cap Value Series

McDonalds

Risk-Adjusted Performance

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 recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Small Cap Value

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Series are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small-cap Value may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with McDonalds and Small-cap Value

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

The idea behind McDonalds and Small Cap Value Series 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.

Check out your portfolio center.

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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.