Correlation Between Visa and McDonalds

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

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

Diversification Opportunities for Visa and McDonalds

0.4

Correlation Coefficient

Visa  McDonalds

Very weak diversification

The 3 months correlation between Visa and McDonalds is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Visa 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 Visa Class A 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 Visa i.e., Visa and McDonalds go up and down completely randomly.

Pair Corralation between Visa and McDonalds

Taking into account the 90-day investment horizon Visa Class A is expected to generate 0.89 times more return on investment than McDonalds. However, Visa Class A is 1.12 times less risky than McDonalds. It trades about 0.1 of its potential returns per unit of risk. McDonalds is currently generating about 0.07 per unit of risk. If you would invest  29,100  in Visa Class A on September 17, 2024 and sell it today you would earn a total of  2,374  from holding Visa Class A or generate 8.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.38%
Values	Daily Returns

Visa Class A  vs.  McDonalds

Visa Class A

Risk-Adjusted Performance

8 of 100

OK

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

McDonalds

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating fundamental indicators, McDonalds may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Visa and McDonalds

The main advantage of trading using opposite Visa and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.