Correlation Between Yum China and Starbucks

Can any of the company-specific risk be diversified away by investing in both Yum China and Starbucks 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 Starbucks 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 Starbucks, you can compare the effects of market volatilities on Yum China and Starbucks 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 Starbucks. Check out your portfolio center. Please also check ongoing floating volatility patterns of Yum China and Starbucks.

Diversification Opportunities for Yum China and Starbucks

0.67

Correlation Coefficient

Yum China  Starbucks

Poor diversification

The 3 months correlation between Yum and Starbucks is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Yum China Holdings and Starbucks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Starbucks 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 Starbucks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Starbucks has no effect on the direction of Yum China i.e., Yum China and Starbucks go up and down completely randomly.

Pair Corralation between Yum China and Starbucks

Assuming the 90 days horizon Yum China Holdings is expected to generate 2.09 times more return on investment than Starbucks. However, Yum China is 2.09 times more volatile than Starbucks. It trades about 0.22 of its potential returns per unit of risk. Starbucks is currently generating about 0.14 per unit of risk. If you would invest  3,019  in Yum China Holdings on August 30, 2024 and sell it today you would earn a total of  1,369  from holding Yum China Holdings or generate 45.35% return on investment over 90 days.

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

Yum China Holdings  vs.  Starbucks

Yum China Holdings

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Yum China reported solid returns over the last few months and may actually be approaching a breakup point.

Starbucks

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Starbucks are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental drivers, Starbucks may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Yum China and Starbucks

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

The idea behind Yum China Holdings and Starbucks 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.