Correlation Between Chewy and MercadoLibre

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

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

Diversification Opportunities for Chewy and MercadoLibre

-0.13

Correlation Coefficient

Chewy  MercadoLibre

Good diversification

The 3 months correlation between Chewy and MercadoLibre is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Chewy Inc and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Chewy 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 Chewy Inc 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 Chewy i.e., Chewy and MercadoLibre go up and down completely randomly.

Pair Corralation between Chewy and MercadoLibre

Given the investment horizon of 90 days Chewy Inc is expected to under-perform the MercadoLibre. In addition to that, Chewy is 1.14 times more volatile than MercadoLibre. It trades about -0.02 of its total potential returns per unit of risk. MercadoLibre is currently generating about 0.13 per unit of volatility. If you would invest  172,180  in MercadoLibre on December 30, 2024 and sell it today you would earn a total of  32,627  from holding MercadoLibre or generate 18.95% return on investment over 90 days.

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

Chewy Inc  vs.  MercadoLibre

Chewy Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Chewy Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Chewy is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

MercadoLibre

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MercadoLibre are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady essential indicators, MercadoLibre demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Chewy and MercadoLibre

The main advantage of trading using opposite Chewy and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Chewy 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 Chewy Inc 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.