Does Risk Management Improve Portfolio Outcomes in Nigeria? A Historical Comparison of Equity, Deposit and Volatility-Managed Allocations.

Abstract: This paper compares four simple ways for a Nigerian investor to divide savings between equities and bank deposits: all equities, all deposits, a fixed 50/50 mix rebalanced monthly, and a volatility-managed rule that holds less equity after volatile periods. Using monthly data on the Nigerian Exchange All-Share Index and the twelve-month deposit rate from the Central Bank of Nigeria Statistical Bulletin, the strategies are evaluated over February 2007 to December 2025 (227 months), with portfolio weights based only on past information. The volatility-managed rule, which targets 15 per cent annual volatility using the previous twelve months of returns, produced the highest compound growth (10.8 per cent a year, against 7.9 per cent for equities alone and 9.3 per cent for the 50/50 mix) and the best risk-adjusted return. Diversification of any kind cut the maximum drawdown from 70 per cent to around 40 per cent; the all-equity investor took until August 2023 to recover the peak of February 2008. A block bootstrap shows, however, that the growth advantage of the volatility rule over the 50/50 mix is not statistically reliable (95% interval −3.7 to +5.9 percentage points a year), and its performance is sensitive to the look-back window. Most strikingly, every strategy lost purchasing power. After adjusting for inflation, annual returns ranged from −3.2 per cent for the volatility-managed rule to −5.7 per cent for equities, and in US dollar terms all four lost money. Risk management changed how much Nigerian investors lost; it did not protect them from losing.

Keywords: asset allocation; volatility targeting; diversification; drawdown; real returns; Nigeria

JEL classification: G11; G12; G17