Correlation Between Ford and MercadoLibre
Can any of the company-specific risk be diversified away by investing in both Ford 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 Ford and MercadoLibre into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and MercadoLibre, you can compare the effects of market volatilities on Ford 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 Ford with a short position of MercadoLibre. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and MercadoLibre.
Diversification Opportunities for Ford and MercadoLibre
0.63 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Ford and MercadoLibre is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and MercadoLibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MercadoLibre and Ford 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 Ford 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 Ford i.e., Ford and MercadoLibre go up and down completely randomly.
Pair Corralation between Ford and MercadoLibre
Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the MercadoLibre. But the stock apears to be less risky and, when comparing its historical volatility, Ford Motor is 1.02 times less risky than MercadoLibre. The stock trades about -0.09 of its potential returns per unit of risk. The MercadoLibre is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest 174,980 in MercadoLibre on November 8, 2024 and sell it today you would earn a total of 15,380 from holding MercadoLibre or generate 8.79% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.45% |
| Values | Daily Returns |
Ford Motor vs. MercadoLibre
Performance |
| Timeline |
| Ford Motor |
| MercadoLibre |
Ford and MercadoLibre Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ford and MercadoLibre
The main advantage of trading using opposite Ford and MercadoLibre positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford 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 Ford 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.| MercadoLibre vs. Global Ship Lease | MercadoLibre vs. TRAVEL LEISURE DL 01 | MercadoLibre vs. InPlay Oil Corp | MercadoLibre vs. United Rentals |
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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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