Correlation Between Five Below and MercadoLibre

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

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

Diversification Opportunities for Five Below and MercadoLibre

-0.37

Correlation Coefficient

Five Below  MercadoLibre

Very good diversification

The 3 months correlation between Five and MercadoLibre is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Five Below and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Five Below 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 Five Below are associated (or correlated) with MercadoLibre. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MercadoLibre has no effect on the direction of Five Below i.e., Five Below and MercadoLibre go up and down completely randomly.

Pair Corralation between Five Below and MercadoLibre

Assuming the 90 days horizon Five Below is expected to generate 1.6 times less return on investment than MercadoLibre. In addition to that, Five Below is 1.32 times more volatile than MercadoLibre. It trades about 0.02 of its total potential returns per unit of risk. MercadoLibre is currently generating about 0.03 per unit of volatility. If you would invest  152,560  in MercadoLibre on September 23, 2024 and sell it today you would earn a total of  11,680  from holding MercadoLibre or generate 7.66% return on investment over 90 days.

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

Five Below  vs.  MercadoLibre

Five Below

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Five Below are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Five Below reported solid returns over the last few months and may actually be approaching a breakup point.

MercadoLibre

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MercadoLibre has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's fundamental drivers remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Five Below and MercadoLibre

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

The idea behind Five Below and MercadoLibre 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.