Correlation Between McDonalds and Fortescue Metals

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

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

Diversification Opportunities for McDonalds and Fortescue Metals

0.65

Correlation Coefficient

McDonalds  Fortescue Metals

Poor diversification

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

Pair Corralation between McDonalds and Fortescue Metals

Considering the 90-day investment horizon McDonalds is expected to generate 8.35 times less return on investment than Fortescue Metals. But when comparing it to its historical volatility, McDonalds is 2.38 times less risky than Fortescue Metals. It trades about 0.01 of its potential returns per unit of risk. Fortescue Metals Group is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,170  in Fortescue Metals Group on September 15, 2024 and sell it today you would earn a total of  70.00  from holding Fortescue Metals Group or generate 5.98% return on investment over 90 days.

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

McDonalds  vs.  Fortescue Metals Group

McDonalds

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 1 (%) 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.

Fortescue Metals

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, Fortescue Metals may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with McDonalds and Fortescue Metals

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

The idea behind McDonalds and Fortescue Metals Group 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.