Correlation Between McDonalds and Novartis

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

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

Diversification Opportunities for McDonalds and Novartis

0.76

Correlation Coefficient

McDonalds  Novartis

Poor diversification

The 3 months correlation between McDonalds and Novartis is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Novartis AG ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Novartis AG ADR and McDonalds 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 McDonalds are associated (or correlated) with Novartis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Novartis AG ADR has no effect on the direction of McDonalds i.e., McDonalds and Novartis go up and down completely randomly.

Pair Corralation between McDonalds and Novartis

Considering the 90-day investment horizon McDonalds is expected to under-perform the Novartis. But the stock apears to be less risky and, when comparing its historical volatility, McDonalds is 1.09 times less risky than Novartis. The stock trades about -0.17 of its potential returns per unit of risk. The Novartis AG ADR is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  9,846  in Novartis AG ADR on January 29, 2024 and sell it today you would lose (102.00) from holding Novartis AG ADR or give up 1.04% of portfolio value over 90 days.

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

McDonalds  vs.  Novartis AG ADR

McDonalds

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days McDonalds has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, McDonalds is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Novartis AG ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Novartis AG ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Novartis is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with McDonalds and Novartis

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

The idea behind McDonalds and Novartis AG ADR 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.