Correlation Between Meliá Hotels and Broadcom

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

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

Diversification Opportunities for Meliá Hotels and Broadcom

0.6

Correlation Coefficient

Meliá Hotels  Broadcom

Poor diversification

The 3 months correlation between Meliá and Broadcom is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Meli Hotels International and Broadcom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broadcom and Meliá Hotels 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 Meli Hotels International are associated (or correlated) with Broadcom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Broadcom has no effect on the direction of Meliá Hotels i.e., Meliá Hotels and Broadcom go up and down completely randomly.

Pair Corralation between Meliá Hotels and Broadcom

Assuming the 90 days horizon Meliá Hotels is expected to generate 16.71 times less return on investment than Broadcom. But when comparing it to its historical volatility, Meli Hotels International is 2.5 times less risky than Broadcom. It trades about 0.02 of its potential returns per unit of risk. Broadcom is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  16,559  in Broadcom on October 22, 2024 and sell it today you would earn a total of  6,466  from holding Broadcom or generate 39.05% return on investment over 90 days.

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

Meli Hotels International  vs.  Broadcom

Meli Hotels International

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Meli Hotels International are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Meliá Hotels is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Broadcom

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental indicators, Broadcom unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Meliá Hotels and Broadcom

The main advantage of trading using opposite Meliá Hotels and Broadcom positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Meliá Hotels position performs unexpectedly, Broadcom 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 Broadcom will offset losses from the drop in Broadcom's long position.

The idea behind Meli Hotels International and Broadcom 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .