Correlation Between Nigerian Stock and NPF MICRO

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Can any of the company-specific risk be diversified away by investing in both Nigerian Stock and NPF MICRO 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 NPF MICRO 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 NPF MICRO FINANCE, you can compare the effects of market volatilities on Nigerian Stock and NPF MICRO 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 NPF MICRO. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nigerian Stock and NPF MICRO.

Diversification Opportunities for Nigerian Stock and NPF MICRO

0.19
  Correlation Coefficient

Average diversification

The 3 months correlation between Nigerian and NPF is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Nigerian Stock Exchange and NPF MICRO FINANCE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NPF MICRO FINANCE 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 NPF MICRO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NPF MICRO FINANCE has no effect on the direction of Nigerian Stock i.e., Nigerian Stock and NPF MICRO go up and down completely randomly.
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Pair Corralation between Nigerian Stock and NPF MICRO

Assuming the 90 days trading horizon Nigerian Stock Exchange is expected to generate 0.26 times more return on investment than NPF MICRO. However, Nigerian Stock Exchange is 3.91 times less risky than NPF MICRO. It trades about 0.16 of its potential returns per unit of risk. NPF MICRO FINANCE is currently generating about -0.01 per unit of risk. If you would invest  6,393,072  in Nigerian Stock Exchange on September 12, 2024 and sell it today you would earn a total of  3,427,625  from holding Nigerian Stock Exchange or generate 53.61% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy99.71%
ValuesDaily Returns

Nigerian Stock Exchange  vs.  NPF MICRO FINANCE

 Performance 
       Timeline  

Nigerian Stock and NPF MICRO Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Nigerian Stock and NPF MICRO

The main advantage of trading using opposite Nigerian Stock and NPF MICRO positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nigerian Stock position performs unexpectedly, NPF MICRO 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 NPF MICRO will offset losses from the drop in NPF MICRO's long position.
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The idea behind Nigerian Stock Exchange and NPF MICRO FINANCE 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.

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