Correlation Between Nigerian Stock and CROBEX

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

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

Diversification Opportunities for Nigerian Stock and CROBEX

0.13

Correlation Coefficient

Nigerian Stock  CROBEX

Average diversification

The 3 months correlation between Nigerian and CROBEX is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Nigerian Stock Exchange and CROBEX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CROBEX and Nigerian Stock 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 Nigerian Stock Exchange are associated (or correlated) with CROBEX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CROBEX has no effect on the direction of Nigerian Stock i.e., Nigerian Stock and CROBEX go up and down completely randomly.

Pair Corralation between Nigerian Stock and CROBEX

Assuming the 90 days trading horizon Nigerian Stock Exchange is expected to under-perform the CROBEX. But the index apears to be less risky and, when comparing its historical volatility, Nigerian Stock Exchange is 1.03 times less risky than CROBEX. The index trades about -0.03 of its potential returns per unit of risk. The CROBEX is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  280,790  in CROBEX on September 1, 2024 and sell it today you would earn a total of  35,374  from holding CROBEX or generate 12.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.21%
Values	Daily Returns

Nigerian Stock Exchange  vs.  CROBEX

Pair Trading with Nigerian Stock and CROBEX

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

The idea behind Nigerian Stock Exchange and CROBEX 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.