Correlation Between Nigerian Stock and AMS Small

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

Diversification Opportunities for Nigerian Stock and AMS Small

0.36

Correlation Coefficient

Nigerian Stock  AMS Small

Weak diversification

The 3 months correlation between Nigerian and AMS is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Nigerian Stock Exchange and AMS Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AMS Small Cap 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 AMS Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AMS Small Cap has no effect on the direction of Nigerian Stock i.e., Nigerian Stock and AMS Small go up and down completely randomly.

Pair Corralation between Nigerian Stock and AMS Small

Assuming the 90 days trading horizon Nigerian Stock is expected to generate 4.67 times less return on investment than AMS Small. But when comparing it to its historical volatility, Nigerian Stock Exchange is 2.41 times less risky than AMS Small. It trades about 0.09 of its potential returns per unit of risk. AMS Small Cap is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  127,173  in AMS Small Cap on February 10, 2025 and sell it today you would earn a total of  17,206  from holding AMS Small Cap or generate 13.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.83%
Values	Daily Returns

Nigerian Stock Exchange  vs.  AMS Small Cap

Pair Trading with Nigerian Stock and AMS Small

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

The idea behind Nigerian Stock Exchange and AMS Small Cap 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.