Is Diversification Enough When Markets Crash? Downside Risk and Conditional Value-at-Risk Allocation in Nigeria.

Abstract: Investors in Nigerian equities have lived through severe losses, including a fall of about 70 per cent in 2008– 2009 and a 30 per cent loss in the single month of January 2009. This paper asks whether simple diversification protects against such losses, or whether allocation rules that target tail risk directly do better. Using monthly All-Share Index returns and twelve-month deposit rates from the Central Bank of Nigeria for February 2007 to December 2025 (227 months), I compare equities only, deposits only, a fixed 50/50 mix, a volatility-managed rule and a conditional value-at-risk (CVaR) budget rule that holds the largest equity weight whose historical 95 per cent CVaR over the previous 36 months stays above −5 per cent a month. All weights use past information only. The fixed 50/50 mix halved the 95 per cent CVaR of equities, from −14.7 to −6.9 per cent a month (block-bootstrap 95% interval for the improvement: 4.9 to 11.2 points), and cut the maximum drawdown from 70 to 39 per cent. The CVaR rule did not improve on it. Because the three years before 2008 had been calm, the rule held 85 per cent equities going into the crash, and over the full sample it delivered lower growth (8.6 against 9.3 per cent a year) and a slightly worse realised CVaR (−7.7 per cent) than the fixed mix. A pure minimum-CVaR rule is degenerate, holding no equities in 95 per cent of months. Tighter loss limits reduce drawdowns, but the results are sensitive to the limit and window chosen. In Nigeria, plain diversification did most of the work of downside protection; tail-risk rules estimated from recent history arrived too late.

Keywords: downside risk; conditional value at risk; expected shortfall; portfolio allocation; drawdown; Nigeria

JEL classification: G11; G12; G17