Correlation Between Nigerian Stock and IBEX 35

Can any of the company-specific risk be diversified away by investing in both Nigerian Stock and IBEX 35 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 IBEX 35 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 IBEX 35 Index, you can compare the effects of market volatilities on Nigerian Stock and IBEX 35 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 IBEX 35. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nigerian Stock and IBEX 35.

Diversification Opportunities for Nigerian Stock and IBEX 35

0.79

Correlation Coefficient

Nigerian Stock  IBEX 35

Poor diversification

The 3 months correlation between Nigerian and IBEX is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Nigerian Stock Exchange and IBEX 35 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on IBEX 35 Index 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 IBEX 35. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of IBEX 35 Index has no effect on the direction of Nigerian Stock i.e., Nigerian Stock and IBEX 35 go up and down completely randomly.

Pair Corralation between Nigerian Stock and IBEX 35

Assuming the 90 days trading horizon Nigerian Stock is expected to generate 2.98 times less return on investment than IBEX 35. But when comparing it to its historical volatility, Nigerian Stock Exchange is 2.27 times less risky than IBEX 35. It trades about 0.03 of its potential returns per unit of risk. IBEX 35 Index is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,139,530  in IBEX 35 Index on September 1, 2024 and sell it today you would earn a total of  24,600  from holding IBEX 35 Index or generate 2.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Nigerian Stock Exchange  vs.  IBEX 35 Index

Pair Trading with Nigerian Stock and IBEX 35

The main advantage of trading using opposite Nigerian Stock and IBEX 35 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nigerian Stock position performs unexpectedly, IBEX 35 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 IBEX 35 will offset losses from the drop in IBEX 35's long position.

The idea behind Nigerian Stock Exchange and IBEX 35 Index 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.