Correlation Between Yum Brands and Domino’s Pizza

Can any of the company-specific risk be diversified away by investing in both Yum Brands and Domino’s Pizza 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 Yum Brands and Domino’s Pizza into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Yum Brands and Dominos Pizza Group, you can compare the effects of market volatilities on Yum Brands and Domino’s Pizza 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 Yum Brands with a short position of Domino’s Pizza. Check out your portfolio center. Please also check ongoing floating volatility patterns of Yum Brands and Domino’s Pizza.

Diversification Opportunities for Yum Brands and Domino’s Pizza

0.29

Correlation Coefficient

Yum Brands  Domino’s Pizza

Modest diversification

The 3 months correlation between Yum and Domino’s is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Yum Brands and Dominos Pizza Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dominos Pizza Group and Yum Brands 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 Yum Brands are associated (or correlated) with Domino’s Pizza. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dominos Pizza Group has no effect on the direction of Yum Brands i.e., Yum Brands and Domino’s Pizza go up and down completely randomly.

Pair Corralation between Yum Brands and Domino’s Pizza

Considering the 90-day investment horizon Yum Brands is expected to generate 0.98 times more return on investment than Domino’s Pizza. However, Yum Brands is 1.02 times less risky than Domino’s Pizza. It trades about 0.19 of its potential returns per unit of risk. Dominos Pizza Group is currently generating about 0.01 per unit of risk. If you would invest  12,975  in Yum Brands on December 19, 2024 and sell it today you would earn a total of  2,776  from holding Yum Brands or generate 21.39% return on investment over 90 days.

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

Yum Brands  vs.  Dominos Pizza Group

Yum Brands

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting basic indicators, Yum Brands displayed solid returns over the last few months and may actually be approaching a breakup point.

Dominos Pizza Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Dominos Pizza Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong forward-looking signals, Domino’s Pizza is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Yum Brands and Domino’s Pizza

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

The idea behind Yum Brands and Dominos Pizza Group 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.