Correlation Between MercadoLibre and NMI Holdings

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

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

Diversification Opportunities for MercadoLibre and NMI Holdings

-0.29

Correlation Coefficient

MercadoLibre  NMI Holdings

Very good diversification

The 3 months correlation between MercadoLibre and NMI is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding MercadoLibre and NMI Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NMI Holdings and MercadoLibre 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 MercadoLibre are associated (or correlated) with NMI Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NMI Holdings has no effect on the direction of MercadoLibre i.e., MercadoLibre and NMI Holdings go up and down completely randomly.

Pair Corralation between MercadoLibre and NMI Holdings

Assuming the 90 days trading horizon MercadoLibre is expected to generate 2.0 times more return on investment than NMI Holdings. However, MercadoLibre is 2.0 times more volatile than NMI Holdings. It trades about 0.1 of its potential returns per unit of risk. NMI Holdings is currently generating about -0.03 per unit of risk. If you would invest  165,000  in MercadoLibre on December 30, 2024 and sell it today you would earn a total of  31,580  from holding MercadoLibre or generate 19.14% return on investment over 90 days.

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

MercadoLibre  vs.  NMI Holdings

MercadoLibre

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MercadoLibre are ranked lower than 8 (%) 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.

NMI Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days NMI Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, NMI Holdings is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with MercadoLibre and NMI Holdings

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

The idea behind MercadoLibre and NMI Holdings 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.