Correlation Between Toyota and McDonalds

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

By analyzing existing cross correlation between Toyota Motor and McDonalds, you can compare the effects of market volatilities on Toyota and McDonalds 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 Toyota with a short position of McDonalds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Toyota and McDonalds.

Diversification Opportunities for Toyota and McDonalds

0.52

Correlation Coefficient

Toyota  McDonalds

Very weak diversification

The 3 months correlation between Toyota and McDonalds is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Toyota 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 Toyota Motor are associated (or correlated) with McDonalds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McDonalds has no effect on the direction of Toyota i.e., Toyota and McDonalds go up and down completely randomly.

Pair Corralation between Toyota and McDonalds

Assuming the 90 days trading horizon Toyota Motor is expected to generate 2.89 times more return on investment than McDonalds. However, Toyota is 2.89 times more volatile than McDonalds. It trades about 0.1 of its potential returns per unit of risk. McDonalds is currently generating about 0.11 per unit of risk. If you would invest  349,900  in Toyota Motor on December 5, 2024 and sell it today you would earn a total of  16,900  from holding Toyota Motor or generate 4.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	26.67%
Values	Daily Returns

Toyota Motor  vs.  McDonalds

Toyota Motor

Risk-Adjusted Performance

OK

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

McDonalds

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, McDonalds may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Toyota and McDonalds

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

The idea behind Toyota Motor and McDonalds 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.