Correlation Between Verizon Communications and McDonalds

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

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

Diversification Opportunities for Verizon Communications and McDonalds

0.3

Correlation Coefficient

Verizon Communications  McDonalds

Weak diversification

The 3 months correlation between Verizon and McDonalds is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Verizon Communications 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 Verizon Communications 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 Verizon Communications i.e., Verizon Communications and McDonalds go up and down completely randomly.

Pair Corralation between Verizon Communications and McDonalds

Assuming the 90 days horizon Verizon Communications is expected to generate 2.3 times less return on investment than McDonalds. In addition to that, Verizon Communications is 1.48 times more volatile than McDonalds. It trades about 0.02 of its total potential returns per unit of risk. McDonalds is currently generating about 0.07 per unit of volatility. If you would invest  564,273  in McDonalds on September 17, 2024 and sell it today you would earn a total of  34,227  from holding McDonalds or generate 6.07% return on investment over 90 days.

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

Verizon Communications  vs.  McDonalds

Verizon Communications

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong primary indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 Verizon Communications and McDonalds

The main advantage of trading using opposite Verizon Communications and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Verizon Communications 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 Verizon Communications 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.