Correlation Between BEL Small and Nigerian Stock

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

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

Diversification Opportunities for BEL Small and Nigerian Stock

0.6

Correlation Coefficient

BEL Small  Nigerian Stock

Poor diversification

The 3 months correlation between BEL and Nigerian is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding BEL Small and Nigerian Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nigerian Stock Exchange and BEL Small 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 BEL Small are associated (or correlated) with Nigerian Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nigerian Stock Exchange has no effect on the direction of BEL Small i.e., BEL Small and Nigerian Stock go up and down completely randomly.

Pair Corralation between BEL Small and Nigerian Stock

Assuming the 90 days trading horizon BEL Small is expected to generate 2.17 times more return on investment than Nigerian Stock. However, BEL Small is 2.17 times more volatile than Nigerian Stock Exchange. It trades about -0.09 of its potential returns per unit of risk. Nigerian Stock Exchange is currently generating about -0.82 per unit of risk. If you would invest  928,234  in BEL Small on February 2, 2024 and sell it today you would lose (17,070) from holding BEL Small or give up 1.84% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	86.36%
Values	Daily Returns

BEL Small  vs.  Nigerian Stock Exchange

Pair Trading with BEL Small and Nigerian Stock

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

The idea behind BEL Small and Nigerian Stock Exchange 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.