Correlation Between McDonalds and IShares Aerospace

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

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

Diversification Opportunities for McDonalds and IShares Aerospace

0.17

Correlation Coefficient

McDonalds  IShares Aerospace

Average diversification

The 3 months correlation between McDonalds and IShares is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and iShares Aerospace Defense in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Aerospace Defense 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 IShares Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Aerospace Defense has no effect on the direction of McDonalds i.e., McDonalds and IShares Aerospace go up and down completely randomly.

Pair Corralation between McDonalds and IShares Aerospace

Considering the 90-day investment horizon McDonalds is expected to generate 0.97 times more return on investment than IShares Aerospace. However, McDonalds is 1.03 times less risky than IShares Aerospace. It trades about 0.09 of its potential returns per unit of risk. iShares Aerospace Defense is currently generating about -0.04 per unit of risk. If you would invest  29,424  in McDonalds on November 28, 2024 and sell it today you would earn a total of  1,648  from holding McDonalds or generate 5.6% return on investment over 90 days.

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

McDonalds  vs.  iShares Aerospace Defense

McDonalds

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 7 (%) 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.

iShares Aerospace Defense

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Aerospace Defense has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, IShares Aerospace is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with McDonalds and IShares Aerospace

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

The idea behind McDonalds and iShares Aerospace Defense 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.