Correlation Between Toyota and MercadoLibre

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

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

Diversification Opportunities for Toyota and MercadoLibre

-0.74

Correlation Coefficient

Toyota  MercadoLibre

Pay attention - limited upside

The 3 months correlation between Toyota and MercadoLibre is -0.74. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Toyota 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 Toyota Motor 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 Toyota i.e., Toyota and MercadoLibre go up and down completely randomly.

Pair Corralation between Toyota and MercadoLibre

Assuming the 90 days trading horizon Toyota Motor is expected to under-perform the MercadoLibre. But the stock apears to be less risky and, when comparing its historical volatility, Toyota Motor is 1.35 times less risky than MercadoLibre. The stock trades about -0.1 of its potential returns per unit of risk. The MercadoLibre is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  8,846  in MercadoLibre on December 27, 2024 and sell it today you would earn a total of  1,083  from holding MercadoLibre or generate 12.24% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

Toyota Motor  vs.  MercadoLibre

Toyota Motor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Toyota Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

MercadoLibre

Risk-Adjusted Performance

Modest

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 somewhat weak essential indicators, MercadoLibre sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toyota and MercadoLibre

The main advantage of trading using opposite Toyota and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Toyota 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 Toyota Motor 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..