Systemic Risk and Stock Market Performance in Nigeria

No investment in the stock market can thrives without an associated risk and returns. Risk is the variability that is likely associated with future returns from an investment. Basically, there are two types of risk: the systematic and the unsystematic risk. However, the former is an undiversifiable/market/unavodable risk compared to the latter which is a diversifiable/aviodable risk. According to Bartov and Bodnar (1994), the systematic risk principle states that the reward for bearing risk depends only on the systematic risk (interest rate risk, inflation rate risk, Political risk, exchange rate risk etc.) of an investment. This is because unsystematic risks such as poor management, competition, custom tariff are diversifiable. The implication of this for investors is that according to Capital Asset Pricing Model (CAPM), they only need to bother themselves about systematic risk of a security. Systematic risk affects the prices of financial asset traded in the market. It is common to argue that the expected return on an asset should be positively related to its risk. Individuals will hold a risky asset only if its expected return compensates for its risk (Ansi & Ouda, 2009). Several investors in the Nigerian stock market are basically concerned with the returns without emphasis on impending risk and overall market volatility; such as in the study of Dickson and Muragu (1994) which is encumbered with unassessment or undiversifified or market risk with a predominant focus on the efficiency of the market among selected firms in Nairobi Stock Exchange (Muiruri, 2014). This study is expected to rekindle the importance of establishing the relationship between risks and returns that has been proposed by CAPM, while taking into consideration the systematic risk of security investments within stock market. To this end, the study was concerned with the examining the relationship between market risk and security returns in the Nigerian capital market.