Correlation Between Advance Auto and MercadoLibre

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

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

Diversification Opportunities for Advance Auto and MercadoLibre

-0.17

Correlation Coefficient

Advance Auto  MercadoLibre

Good diversification

The 3 months correlation between Advance and MercadoLibre is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Advance Auto 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 Advance Auto Parts 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 Advance Auto i.e., Advance Auto and MercadoLibre go up and down completely randomly.

Pair Corralation between Advance Auto and MercadoLibre

Assuming the 90 days trading horizon Advance Auto Parts is expected to generate 1.19 times more return on investment than MercadoLibre. However, Advance Auto is 1.19 times more volatile than MercadoLibre. It trades about -0.04 of its potential returns per unit of risk. MercadoLibre is currently generating about -0.15 per unit of risk. If you would invest  1,782  in Advance Auto Parts on October 11, 2024 and sell it today you would lose (52.00) from holding Advance Auto Parts or give up 2.92% of portfolio value over 90 days.

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

Advance Auto Parts  vs.  MercadoLibre

Advance Auto Parts

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Advance Auto sustained 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 weak performance, the Stock's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Advance Auto and MercadoLibre

The main advantage of trading using opposite Advance Auto and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Advance Auto 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 Advance Auto Parts 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.

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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.