Correlation Between Compass Group and McDonalds

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

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

Diversification Opportunities for Compass Group and McDonalds

0.43

Correlation Coefficient

Compass Group  McDonalds

Very weak diversification

The 3 months correlation between Compass and McDonalds is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Compass Group PLC and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Compass Group 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 Compass Group PLC 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 Compass Group i.e., Compass Group and McDonalds go up and down completely randomly.

Pair Corralation between Compass Group and McDonalds

Assuming the 90 days trading horizon Compass Group is expected to generate 1.27 times less return on investment than McDonalds. In addition to that, Compass Group is 3.31 times more volatile than McDonalds. It trades about 0.04 of its total potential returns per unit of risk. McDonalds is currently generating about 0.17 per unit of volatility. If you would invest  27,619  in McDonalds on September 23, 2024 and sell it today you would earn a total of  531.00  from holding McDonalds or generate 1.92% return on investment over 90 days.

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

Compass Group PLC  vs.  McDonalds

Compass Group PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Compass Group PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Compass Group may actually be approaching a critical reversion point that can send shares even higher in January 2025.

McDonalds

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, McDonalds is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Compass Group and McDonalds

The main advantage of trading using opposite Compass Group and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Compass Group 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 Compass Group PLC 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.