Correlation Between Yum China and Rolls-Royce Holdings

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

By analyzing existing cross correlation between Yum China Holdings and Rolls Royce Holdings plc, you can compare the effects of market volatilities on Yum China and Rolls-Royce Holdings 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 Yum China with a short position of Rolls-Royce Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Yum China and Rolls-Royce Holdings.

Diversification Opportunities for Yum China and Rolls-Royce Holdings

0.64

Correlation Coefficient

Yum China  Rolls-Royce Holdings

Poor diversification

The 3 months correlation between Yum and Rolls-Royce is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Yum China Holdings and Rolls Royce Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rolls Royce Holdings and Yum China 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 Yum China Holdings are associated (or correlated) with Rolls-Royce Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rolls Royce Holdings has no effect on the direction of Yum China i.e., Yum China and Rolls-Royce Holdings go up and down completely randomly.

Pair Corralation between Yum China and Rolls-Royce Holdings

Given the investment horizon of 90 days Yum China is expected to generate 5.4 times less return on investment than Rolls-Royce Holdings. But when comparing it to its historical volatility, Yum China Holdings is 2.57 times less risky than Rolls-Royce Holdings. It trades about 0.03 of its potential returns per unit of risk. Rolls Royce Holdings plc is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  0.30  in Rolls Royce Holdings plc on January 11, 2025 and sell it today you would earn a total of  0.05  from holding Rolls Royce Holdings plc or generate 16.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.41%
Values	Daily Returns

Yum China Holdings  vs.  Rolls Royce Holdings plc

Yum China Holdings

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, Yum China is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Rolls Royce Holdings

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental indicators, Rolls-Royce Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Yum China and Rolls-Royce Holdings

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

The idea behind Yum China Holdings and Rolls Royce Holdings plc 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.