Correlation Between Basic Materials and MercadoLibre

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

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

Diversification Opportunities for Basic Materials and MercadoLibre

0.14

Correlation Coefficient

Basic Materials  MercadoLibre

Average diversification

The 3 months correlation between Basic and MercadoLibre is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Basic Materials 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 Basic Materials 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 Basic Materials i.e., Basic Materials and MercadoLibre go up and down completely randomly.

Pair Corralation between Basic Materials and MercadoLibre

Assuming the 90 days trading horizon Basic Materials is expected to under-perform the MercadoLibre. But the index apears to be less risky and, when comparing its historical volatility, Basic Materials is 2.55 times less risky than MercadoLibre. The index trades about -0.07 of its potential returns per unit of risk. The MercadoLibre is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  9,482  in MercadoLibre on October 10, 2024 and sell it today you would lose (471.00) from holding MercadoLibre or give up 4.97% of portfolio value over 90 days.

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

Basic Materials  vs.  MercadoLibre

Pair Trading with Basic Materials and MercadoLibre

The main advantage of trading using opposite Basic Materials and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials 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 Basic Materials 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.