Correlation Between Microsoft and MercadoLibre

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

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

Diversification Opportunities for Microsoft and MercadoLibre

-0.04

Correlation Coefficient

Microsoft  MercadoLibre

Good diversification

The 3 months correlation between Microsoft and MercadoLibre is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Microsoft 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 Microsoft 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 Microsoft i.e., Microsoft and MercadoLibre go up and down completely randomly.

Pair Corralation between Microsoft and MercadoLibre

Given the investment horizon of 90 days Microsoft is expected to under-perform the MercadoLibre. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.69 times less risky than MercadoLibre. The stock trades about -0.07 of its potential returns per unit of risk. The MercadoLibre is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  148,858  in MercadoLibre on February 7, 2024 and sell it today you would earn a total of  16,527  from holding MercadoLibre or generate 11.1% return on investment over 90 days.

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

Microsoft  vs.  MercadoLibre

Microsoft

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

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 fairly strong essential indicators, MercadoLibre is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Microsoft and MercadoLibre

The main advantage of trading using opposite Microsoft and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft 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 Microsoft 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.