Correlation Between Ulta Beauty and MercadoLibre

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

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

Diversification Opportunities for Ulta Beauty and MercadoLibre

-0.75

Correlation Coefficient

Ulta Beauty  MercadoLibre

Pay attention - limited upside

The 3 months correlation between Ulta and MercadoLibre is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding Ulta Beauty and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Ulta Beauty 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 Ulta Beauty 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 Ulta Beauty i.e., Ulta Beauty and MercadoLibre go up and down completely randomly.

Pair Corralation between Ulta Beauty and MercadoLibre

Assuming the 90 days trading horizon Ulta Beauty is expected to under-perform the MercadoLibre. In addition to that, Ulta Beauty is 1.1 times more volatile than MercadoLibre. It trades about -0.14 of its total potential returns per unit of risk. MercadoLibre is currently generating about 0.1 per unit of volatility. If you would invest  9,038  in MercadoLibre on December 26, 2024 and sell it today you would earn a total of  1,382  from holding MercadoLibre or generate 15.29% return on investment over 90 days.

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

Ulta Beauty  vs.  MercadoLibre

Ulta Beauty

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ulta Beauty has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's essential indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

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

Pair Trading with Ulta Beauty and MercadoLibre

The main advantage of trading using opposite Ulta Beauty and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ulta Beauty 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 Ulta Beauty 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.

Check out your portfolio center.

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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.