Correlation Between McDonalds and Ross Stores

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Can any of the company-specific risk be diversified away by investing in both McDonalds and Ross Stores 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 Ross Stores into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between McDonalds and Ross Stores, you can compare the effects of market volatilities on McDonalds and Ross Stores 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 Ross Stores. Check out your portfolio center. Please also check ongoing floating volatility patterns of McDonalds and Ross Stores.

Diversification Opportunities for McDonalds and Ross Stores

-0.09
  Correlation Coefficient

Good diversification

The 3 months correlation between McDonalds and Ross is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Ross Stores in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ross Stores 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 Ross Stores. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ross Stores has no effect on the direction of McDonalds i.e., McDonalds and Ross Stores go up and down completely randomly.

Pair Corralation between McDonalds and Ross Stores

Assuming the 90 days trading horizon McDonalds is expected to under-perform the Ross Stores. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 1.95 times less risky than Ross Stores. The stock trades about -0.01 of its potential returns per unit of risk. The Ross Stores is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  288,967  in Ross Stores on October 23, 2024 and sell it today you would earn a total of  24,433  from holding Ross Stores or generate 8.46% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy30.0%
ValuesDaily Returns

McDonalds  vs.  Ross Stores

 Performance 
       Timeline  
McDonalds 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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 fairly strong fundamental indicators, McDonalds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Ross Stores 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Solid
Over the last 90 days Ross Stores has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly weak basic indicators, Ross Stores showed solid returns over the last few months and may actually be approaching a breakup point.

McDonalds and Ross Stores Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with McDonalds and Ross Stores

The main advantage of trading using opposite McDonalds and Ross Stores positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if McDonalds position performs unexpectedly, Ross Stores 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 Ross Stores will offset losses from the drop in Ross Stores' long position.
The idea behind McDonalds and Ross Stores 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.

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