Correlation Between Yum Brands and Yum China

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

By analyzing existing cross correlation between Yum Brands and Yum China Holdings, you can compare the effects of market volatilities on Yum Brands and Yum China 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 Yum China. Check out your portfolio center. Please also check ongoing floating volatility patterns of Yum Brands and Yum China.

Diversification Opportunities for Yum Brands and Yum China

0.78

Correlation Coefficient

Yum Brands  Yum China

Poor diversification

The 3 months correlation between Yum and Yum is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Yum Brands and Yum China Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yum China Holdings 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 Yum China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yum China Holdings has no effect on the direction of Yum Brands i.e., Yum Brands and Yum China go up and down completely randomly.

Pair Corralation between Yum Brands and Yum China

Considering the 90-day investment horizon Yum Brands is expected to generate 0.75 times more return on investment than Yum China. However, Yum Brands is 1.33 times less risky than Yum China. It trades about 0.14 of its potential returns per unit of risk. Yum China Holdings is currently generating about 0.03 per unit of risk. If you would invest  13,536  in Yum Brands on December 26, 2024 and sell it today you would earn a total of  2,044  from holding Yum Brands or generate 15.1% return on investment over 90 days.

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

Yum Brands  vs.  Yum China Holdings

Yum Brands

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Yum Brands are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Yum Brands displayed solid returns over the last few months and may actually be approaching a breakup point.

Yum China Holdings

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Yum China Holdings are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, Yum China is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Yum Brands and Yum China

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

The idea behind Yum Brands and Yum China Holdings 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.

Check out your portfolio center.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.