CHAPTER ONE
GENERAL INTRODUCTION
1.1 BACKGROUND OF STUDY
It is well established among finance scholars and professionals that stock market sectors information allows investors and scholars to observe the performance of a particular stock in relation to other stocks and/or stock index. Campello, Giambona, Graham and Harvey (2011) indicate that overall market conditions have large effects on the prices of individual stocks. Hence, understanding the behaviour of market indices and the various industry groups can be a valuable tool in portfolio management. Stock market sector analysis also provides the basis for benchmarking the performance of a particular stock or sector as well as guide to domestic and international diversification of investments.
The principle of portfolio diversification describes the optimal combination of portfolio returns and risks required to maintain expected portfolio return. It stresses the importance of selecting portfolio components that have low correlation in their returns as well as low covariance (see, Markowitz, 1952; Cappiello, Engle & Sheppard, 2006; Emenike, 2015). Analysing the performance of stock market sectors will reveal the nature of interaction between the sector, which will in turn form basis for portfolio selection and investment decisions.
Stock markets are usually divided into sectors by industry classification. Each of the sectors or combination of sectors has an index, which reflects the general sector(s) movement. Stock market Index, according to Guha, Dutta and Bandyopadhyay (2016), is considered as a barometer to judge the sentiment of the market. The index is usually monitored by different stock market stakeholders, such as financial markets researchers and analysts for providing accurate analysis, investors to purchase or sell financial assets, policy makers for future policy formulation, and so on. The Nigerian Stock Exchange (NSE) created and maintains eleven indexes, which are all-share index, banking index, consumer goods index, oil & gas index, NSE 30 index, insurance index, industrial goods index, pension index, premium index, lotus Islamic index, and alternative securities market index.
Numerous empirical studies have recently been conducted to examine the correlation between sectors of stock markets both in developed and developing economies (see for example, Sharabati, Noor and Saymeh, 2013; Cao, Long & Yang, 2013; Rajamohan and Muthukamu, 2014; Yilmaz, Sensoy, Ozturk & Hacihasanoglu, 2015; Guha, Dutta and Bandyopadhyay, 2016); however the performance and correlations of sectors and their portfolio diversification implications have not been explored adequately in the NSE. Comparative analysis of the NSE sectors indexes will provide investors with an idea of how well a given group of companies are expected to perform as a whole. Thus there is need for empirical comparative analysis of the sectors of the NSE.
