Correlation Between Diamond Hill and McDonalds

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Can any of the company-specific risk be diversified away by investing in both Diamond Hill 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 Diamond Hill and McDonalds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Diamond Hill Investment and McDonalds, you can compare the effects of market volatilities on Diamond Hill 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 Diamond Hill with a short position of McDonalds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diamond Hill and McDonalds.

Diversification Opportunities for Diamond Hill and McDonalds

0.89
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Diamond and McDonalds is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Diamond Hill Investment and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds and Diamond Hill 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 Diamond Hill Investment 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 Diamond Hill i.e., Diamond Hill and McDonalds go up and down completely randomly.

Pair Corralation between Diamond Hill and McDonalds

Given the investment horizon of 90 days Diamond Hill Investment is expected to generate 2.34 times more return on investment than McDonalds. However, Diamond Hill is 2.34 times more volatile than McDonalds. It trades about 0.06 of its potential returns per unit of risk. McDonalds is currently generating about -0.04 per unit of risk. If you would invest  17,555  in Diamond Hill Investment on September 8, 2022 and sell it today you would earn a total of  354.00  from holding Diamond Hill Investment or generate 2.02% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Diamond Hill Investment  vs.  McDonalds

 Performance (%) 
       Timeline  
Diamond Hill Investment 
Diamond Performance
2 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Hill Investment are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively steady forward indicators, Diamond Hill is not utilizing all of its potentials. The current stock price chaos, may contribute to medium-term losses for the stakeholders.

Diamond Price Channel

McDonalds 
McDonalds Performance
5 of 100
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 rather sound fundamental indicators, McDonalds is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

McDonalds Price Channel

Diamond Hill and McDonalds Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Diamond Hill and McDonalds

The main advantage of trading using opposite Diamond Hill and McDonalds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diamond Hill 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.
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The idea behind Diamond Hill Investment 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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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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.

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