Correlation Between Alibaba Group and MercadoLibre

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

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

Diversification Opportunities for Alibaba Group and MercadoLibre

0.76

Correlation Coefficient

Alibaba Group  MercadoLibre

Poor diversification

The 3 months correlation between Alibaba and MercadoLibre is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Alibaba Group Holding and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Alibaba Group 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 Alibaba Group Holding 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 Alibaba Group i.e., Alibaba Group and MercadoLibre go up and down completely randomly.

Pair Corralation between Alibaba Group and MercadoLibre

Given the investment horizon of 90 days Alibaba Group Holding is expected to generate 1.42 times more return on investment than MercadoLibre. However, Alibaba Group is 1.42 times more volatile than MercadoLibre. It trades about 0.25 of its potential returns per unit of risk. MercadoLibre is currently generating about 0.08 per unit of risk. If you would invest  8,737  in Alibaba Group Holding on November 28, 2024 and sell it today you would earn a total of  4,664  from holding Alibaba Group Holding or generate 53.38% return on investment over 90 days.

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

Alibaba Group Holding  vs.  MercadoLibre

Alibaba Group Holding

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Alibaba Group Holding are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady fundamental drivers, Alibaba Group sustained solid returns over the last few months and may actually be approaching a breakup point.

MercadoLibre

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MercadoLibre are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady essential indicators, MercadoLibre may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Alibaba Group and MercadoLibre

The main advantage of trading using opposite Alibaba Group and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alibaba Group 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 Alibaba Group Holding 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.