Correlation Between MercadoLibre and Sea

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

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

Diversification Opportunities for MercadoLibre and Sea

-0.9

Correlation Coefficient

MercadoLibre  Sea

Pay attention - limited upside

The 3 months correlation between MercadoLibre and Sea is -0.9. Overlapping area represents the amount of risk that can be diversified away by holding MercadoLibre and Sea in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sea 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 Sea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sea has no effect on the direction of MercadoLibre i.e., MercadoLibre and Sea go up and down completely randomly.

Pair Corralation between MercadoLibre and Sea

Given the investment horizon of 90 days MercadoLibre is expected to under-perform the Sea. But the stock apears to be less risky and, when comparing its historical volatility, MercadoLibre is 1.79 times less risky than Sea. The stock trades about -0.12 of its potential returns per unit of risk. The Sea is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  5,302  in Sea on February 1, 2024 and sell it today you would earn a total of  1,017  from holding Sea or generate 19.18% return on investment over 90 days.

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

MercadoLibre  vs.  Sea

MercadoLibre

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MercadoLibre 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 fairly strong which may send shares a bit higher in June 2024. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Sea

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Sea are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Sea exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MercadoLibre and Sea

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

The idea behind MercadoLibre and Sea 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.