Correlation Between Big 5 and MercadoLibre

Can any of the company-specific risk be diversified away by investing in both Big 5 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 Big 5 and MercadoLibre into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Big 5 Sporting and MercadoLibre, you can compare the effects of market volatilities on Big 5 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 Big 5 with a short position of MercadoLibre. Check out your portfolio center. Please also check ongoing floating volatility patterns of Big 5 and MercadoLibre.

Diversification Opportunities for Big 5 and MercadoLibre

-0.52

Correlation Coefficient

Big 5  MercadoLibre

Excellent diversification

The 3 months correlation between Big and MercadoLibre is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Big 5 Sporting and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Big 5 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 Big 5 Sporting 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 Big 5 i.e., Big 5 and MercadoLibre go up and down completely randomly.

Pair Corralation between Big 5 and MercadoLibre

Assuming the 90 days horizon Big 5 Sporting is expected to under-perform the MercadoLibre. In addition to that, Big 5 is 1.25 times more volatile than MercadoLibre. It trades about -0.28 of its total potential returns per unit of risk. MercadoLibre is currently generating about 0.08 per unit of volatility. If you would invest  172,960  in MercadoLibre on December 31, 2024 and sell it today you would earn a total of  23,620  from holding MercadoLibre or generate 13.66% return on investment over 90 days.

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

Big 5 Sporting  vs.  MercadoLibre

Big 5 Sporting

Risk-Adjusted Performance

Very Weak

Over the last 90 days Big 5 Sporting has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in May 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

MercadoLibre

Risk-Adjusted Performance

OK

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 nearly uncertain fundamental drivers, MercadoLibre reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Big 5 and MercadoLibre

The main advantage of trading using opposite Big 5 and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Big 5 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 Big 5 Sporting 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.