Correlation Between Nigerian Stock and Kosdaq Composite

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

Diversification Opportunities for Nigerian Stock and Kosdaq Composite

0.84

Correlation Coefficient

Nigerian Stock  Kosdaq Composite

Very poor diversification

The 3 months correlation between Nigerian and Kosdaq is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Nigerian Stock Exchange and Kosdaq Composite Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kosdaq Composite 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 Kosdaq Composite. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kosdaq Composite Index has no effect on the direction of Nigerian Stock i.e., Nigerian Stock and Kosdaq Composite go up and down completely randomly.

Pair Corralation between Nigerian Stock and Kosdaq Composite

Assuming the 90 days trading horizon Nigerian Stock is expected to generate 1.14 times less return on investment than Kosdaq Composite. But when comparing it to its historical volatility, Nigerian Stock Exchange is 2.99 times less risky than Kosdaq Composite. It trades about 0.33 of its potential returns per unit of risk. Kosdaq Composite Index is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  69,200  in Kosdaq Composite Index on November 27, 2024 and sell it today you would earn a total of  8,155  from holding Kosdaq Composite Index or generate 11.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.08%
Values	Daily Returns

Nigerian Stock Exchange  vs.  Kosdaq Composite Index

Pair Trading with Nigerian Stock and Kosdaq Composite

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

The idea behind Nigerian Stock Exchange and Kosdaq Composite 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.

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 Commodity Directory module to find actively traded commodities issued by global exchanges.