Risk Management And Portfolio Analysis In The Capital Market

Risk Management And Portfolio Analysis In The Capital Market
Abstract
Risk Management is the identification, assessment and prioritization of risk or the effect of uncertainty on objectives of an organization, by coordinated economical application of resources to minimize, monitor, and control the probability and the impact of unfortunate events or to maximize the realization of opportunities. Risk can come from uncertainty in financial market, project failures at any phase in development, production or sustainment life-cycles, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary or event of uncertain root-cause. Risk management in capital market basically focus on portfolio analysis. portfolio analysis management is the process used to systematically manage the exposure of financial institutions to loan delinquency and default. The process consists of the following four stages: the identification of potential losses from delinquencies and defaults, evaluation of the potential frequency and severity of losses form portfolio analysiss; development and selection of methods for managing the risks so as to minimize losses and maximize business value, and implementation and ongoing monitoring review of the selected methods. Thus maximization of business value by preventing or minimizing losses from delinquency and default and promoting prompt loan repayment by borrowers is the principal objective of portfolio analysis management in capital market. Bank business value depends on the expected magnitude, timing and variability associated with future net cash flows that will be available to provide shareholders with a return on their investment. Delinquency and default results in losses that reduce business value. portfolio analysis management seek to mitigate this reduction in business value by designing a system that prevents, reduces or deal with delinquencies and defaults when they occur. portfolio analysis management is therefore both an ex-ante and ex-post activity.
Table of Content
- Title Page
- Certification
- Dedication
- Acknowledgement
- Table of Content
- List of Tables
- Abstract
Chapter One:
Introduction
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organisations of the Study
Chapter Two:
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
Chapter Three:
Research Methodology
- 3.1 Research Design
- 3.2 Population of the Study
- 3.3 Sample Size Determination
- 3.4 Sample Size Selection Technique and Procedure
- 3.5 Research Instrument and Administration
- 3.6 Method of Data Collection
- 3.7 Method of Data Analysis
- 3.8 Validity of the Study
- 3.9 Reliability of the Study
- 3.10 Ethical Consideration
Chapter Four:
Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Analysis of Data
- 4.3 Answering Research Questions
- 4.4 Test of Hypotheses
Chapter Five:
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
- References
- APPENDIX
- QUESTIONNAIRE
Chapter One
Introduction
1.1 Background to the Study
Risk is described as ‘the possibility of loss, or other adverse or unwelcome developments. According to Pandy (2019), portfolio risk is the variability that is likely to occur in the future returns of a project. This has to do with financial risk which is inherent in an investment decision. Farounbi (2020) supported this view by stating that risk occurs where it is not known what the future outcome will be but where the various possible outcomes may be expected with, some degree of confidence from knowledge of past or existing events, in order words probabilities of alternatives could be estimated while he described uncertainty as a situation where future outcome cannot be predicted with any degree of confidence from knowledge of past or existing events thus probability estimates are not available for possible outcomes. This is an indication that risk and uncertainty affects investment decisions and therefore directly or indirectly affect the organizational goals and objectives in focus. This explains why Damodaran (2019) viewed portfolio risk to include Liquidity risk, Default risk, Duration risk, Market risk, Inflation rate risk, Interest rate risk, Exchange rate risk, and Concentration risk. Risks and uncertainties are evident in investment decisions thus the management is paramount to the success of organizations.
The capital market as a subset of the financial market plays a vital role in the economy especially in developing economies that require high long term credit to stimulate the large and untapped real sector for sustainable economic growth. According to Owolabi and Adegbite (2018), capital market is important in the mobilization of various savings in the economy and channeling of such funds to the sectors of needs (i.e. savings to profitable self-liquidating investment; and offers easy access to various forms of financial instruments) that enable economic agents to pool, price, and exchange risk within a given financial period. The capital market as a subset of the monetary marketplace plays a important position within the economy in particular in growing economies that require excessive long term credit score to stimulate the massive and untapped actual region for sustainable financial increase. in line with Owolabi and Adegbite (2018), capital marketplace is essential within the mobilization of diverse financial savings in the economic system and channeling of such funds to the sectors of desires (i.e. savings to profitable self-liquidating investment; and gives smooth get entry to numerous sorts of monetary contraptions) that permit economic dealers to pool, price, and alternate danger within a given financial period.
Capital markets are markets for transacting long term monetary securities, which includes regular stocks, long term debt securities including debentures, unsecured loan stock, and convertible bonds. Government bonds and different public zone securities which includes Treasury payments and gilt-edged stocks also are traded on capital markets (Muktadir-Al-Mukit & Shafiullah, 2016). However, as a marketplace where securities (shares, bonds, stocks) are bought and bought openly with relative ease, the inventory trade may be very essential to the buyers. It is a market for government securities, for corporate bonds, for the mobilization and utilization of lengthy-term budget for improvement – the long time stop of the financial machine. In this market, traders provide long term budget in change for long time monetary property presented through debtors. For that reason, a financial system with an active stock marketplace may additionally have its important stock market index often used as a guide in the size of adjustments within the well known degree of economic activities inside the concerned financial system. Similarly, some other major role of the stock market as an economic organization is that it enhances the performance of capital formation and allocation of sources (Ugochuku & Eleanya, 2018).
Following the precedence on what the Nigerian Capital Market has been like before the introduction of the Structural Adjustment Programme (SAP). Alexander (2004) highlighted that many companies could afford to ignore the capital market since they had vast pool of loanable funds to draw from. However, according to the Federal Government Gazette (1989), the introduction of SAP and certain policy measures such as the deregulation of interest rate, mopping up of excess liquidity were introduced with measures. It becomes impossible for business organizations to borrow funds from the money market. As a result more companies are now turning to the capital market. The Nigerian Stock Exchange Market follows a random walk hypothesis. The problem with Ajayi’s work which was quite exhaustive is that his conclusions may not be valid anymore in the structural changes sweeping across Nigerian financial system. Ekechi, in a study of monthly returns between 1977 and 1987 of twenty companies quoted on the Nigerian Stock Exchange also found substantial support for the random walk hypothesis. In the random walk, the variable does not follow a definite pattern like straight-line or even a curve (Jegede, 2003). In an effort to refute the randomness of stock prices, Alexander (2009), tried to device some trading values solely on prices of a security that moves up at least T percent from a subsequent high, at which time it goes short. The short position is maintained until the price rise to at least Y percent above a subsequent low. In order to appreciate the research work, it is better to briefly define the following terms; risk, portfolio and capital market with the content of financial management. Blume (1978), defined risk as the degree of profitability of occurrence assigned to an investing or financial decision from the observed knowledge of the part of existing events. Where there are certain parameters of the decision problem, whole values are impossible to fully specify in advance, it is said that, it is risky, better still, risky events are predictable and foreseeable only within the existence of some degree of confidence. Defined risk as the possibility of an adverse deviation from a desired outcome that is expected. It is a probability that what is got is different from what is expected. A portfolio is a collection of investments of an investor, a portfolio can be a collection of shares, for an investor of a property company his portfolio can be a collection of buildings. For a financial manager of various projects, these will be fully expatiated in the subsequent section the capital market is a market which comprises of many participants which primarily deals with facilities of raising new capital for companies to survive and to enjoy operations in perpetuity. It is market for shares and bonds (Pandey, 2005).
Rejda (2005) is of the view that examination of risk management is a process that identified loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures. Examination of risk management ensures that organization identified and understands the risk to which it is exposed. Examination of risk management also guaranties that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs.
Examination of risk management which is the subject matter of this study is concerned with planning and controlling of activities and resources in order to minimize the impact of unforeseen accident. And examination of risk management plan includes strategies and techniques for recognizing and confronting this threat. Good examination of risk management does not need to be expensive or time consuming; it may be as uncomplicated as answering question such as; what can go wrong? What will we do to prevent the harm from occurring or in response to the harm loss? If something happen, how will we pay it?
Examination of risk management therefore, has to do with the effect of uncertainty on objectives, (whether positive or negative) followed by coordinated and economical application of resources to minimizes, monitor and control the probability and impact of unfortunate events or do maximize the realization of opportunities. Risk can come from uncertainty in financial market, project failures, legal liabilities, portfolio analysis, accident and disasters as well as deliberate attacks from an adversary (Rajaram et al 2009).
Thus in perfecting organizational policies, examination of risk management must be well considered in the system for its efficient survival. Many large companies today have employed a full time manager, an executive whose main job is to identify the various forms of risk facing the firm and determine the best ways to handle them, for example, personal injury, fire damage, helicopter crash, theft of properties, loss of profit in fulfillment of obligation, change interest rates, efficiency fraud etc. Many empirical literatures showed several attempt at explaining and measuring risk-taking behaviors in banks to incentives creates by safety-net program such as the fixed-rate deposit insurance system which though arguably, engenders cross-subsidization by creating avenues to take on risk inefficiency; the so-called moral hazard problem. The moral hazard view of risk taking in banks assumes that shareholders make the lending and investment decisions and therefore take a risk to maximize the value of insurance if they so desire (Owojon et al 2011).
According to the Soludo (2004), it is now time to set up a structure that creates a strong base relative to the kind of economy we are operating where banks become channels to do proper intermediation (The Obasanjo Economic Reforms On The Banking Sector, 2005).
The banking business by its nature is a high risk environment. It is the only business where the proportion of borrowed funds is far higher than the owners’ equity. A high level of financial leverage is usually associated with high risk. This can easily be seen in a situation where adverse rumors, whether founded or precipitated financial panic and by extension a run on a bank. According to Umoh (2002) and Frequson (2003) few banks are able to withstand a persistent run, even in the presence of a good lender of last resort. As depositors take out their funds, the bank is forced eventually to close its doors. Thus, the risks faced by banks are endogenous, associated with the nature of banking business itself, whilst others are exogenous to the banking system. The risk that arise in the course of business which bankers should be able to control include, amongst others, portfolio analysis, liquidity risk, reputation risk, leadership risk and information technology risk. On the other hand, the risk that are exogenous to the banking system which trend to pose the greatest control problem to bankers include regulatory risk, industry risk, government policies risk, sovereign risk and market risk. Other important ones, as added by Umoh (2002), include competition risk human resources risk and fraud risk.
1.2 Statement of the Problem
There is no system that is totally perfect or immune to the effect of the present possibility for banks to diversify into broader range of service and products make life really cool for banking entrepreneurs and managers. But this diversification advantage is a once in a lifetime opportunity that should be consumed with some caution and prudent as this involved a great deal of risk. This is in direct line with the saving that” the higher you go, the colder life becomes; Banks use these deposits to generate credit for their borrowers, which in fact is a revenue generating activity for most banks.
This credit creation process exposes the banks to high default risk which might led to financial distress including bankruptcy. This study looks at problems arising from fraud, forgeries, project, investment portfolios and misadministration. The question here is how responsive are banks, in the examination of management and control risk?
1.3 Objectives of the Study
- To identify the types of risk associated or related to banks in Nigeria.
- To examine management techniques normally applied in the management of the risk in the capital market.
- To suggest how to evaluate and control risk in the capital market.
- To assess how personnel quality in examination of risk management reduce banks distress.
- To find out whether the relationship between the bank officials and customers is cordial.
1.4 Research Question
The study provide answers to the following research questions
- What are the types of risks faced in the capital market?
- What is the efficacy of techniques used by banks to curb the volatile tendency of their environment?
- What is the human capacity needed to respond professionally to risk situation in the banks?
- How banks evaluate and control examination in risk situation?
1.5 Research Hypotheses
For the purpose of this research, the following hypotheses are set to guide the study:
- That there are risks that have direct impact on the operation of banks.
- That examination of risk management is control in the strategic management process of banks.
- That there is a positive relationship between adequate human capacity and the level of risk exposure in the capital market.
- That examination of risk management helps in ensuring the survival of a system (organization).
1.6 Significance of the Study
This research work is of immense significance, hence it contribute to the body of knowledge for further research on the subject matter, also it will help the policy makers to use this research work as a reference or guidance for their policy formulation. Management of banking operations usually depends on subordinates through delegated authority to carry out their duties, it is necessary for management of banking sector to issue policy statement as guide to action.
The creation of examination of risk management in the banking sector place reliance on accounting data generated by the management used for decision making. Also to pressure the asset and income of the organization and banking risk for accidental of loss . Thus, this research work is believed to be of great help to those who are directly or indirectly involve in the banking system. It will be of great importance to; the management of banks, the authorities regulating the banking affairs, both academics and the general public who has interest in and have been so curious about the meaning of risks and assessment of risk management and credit administration.
1.7 Scope of the Study
Thus study focuses on assessment of risk management and portfolio analysis in the capital market. It covers both the phenomenon examination of risk management associated with banks in Nigeria.
1.8 Limitation of the Study
On the other hand, the limitation of the research may include:
a. Time limitation
The length of time available to study and find out how efficient the research work will be completed.
b. Financial Limitation
The money that will be used to run the project.
c. Logistics
Organization that will be needed to make a complicated plan of the research successfully.
1.9 Definition of the Study
In this area of the research work, certain key words are summarized.
1. Risk:
A situation of uncertainty as to the outcome of an event.
2. Risk Management:
The process involving identification measurement and economic control of risk that threatens the assets and profits of a business enterprise.
3. Insurance:
A legal way of protecting your properties, life etc, against loss or harm arising unexpectedly in consideration of a payment proportionate to the risk involved.
4. Enterprise:
A business entity or organization
5. Hazard:
A physical or mortal features that cause damages.
6. Survey:
An inspection of premises or property proposed for insurance.
7. Objectives:
A goal one has set to achieve in future.
8. Management:
The act of running and controlling the affairs of business.
9. Evaluation:
The act of forming an opinion of the amount, value or quality of something after thinking about it careful
1.10 Organization of the Study
This project has been divided into five (5) chapters as follows;
- Chapter one focuses on the introductory aspects of the study .Comprising background to the study, statement of research problem, research hypotheses, objectives of the research, significance of the study, scope and limitation of the study and scheme of chapters.
- Chapter two features the literature reviews which consist of; introduction, concept of risk management, examination of risk management process, importance of risk management, challenges of examination in risk management, solution to the challenges and conclusion.
- Chapter three deals with the research methodology and means of data collections
- Chapter four is based on data presentation and data analysis. It also addresses and discusses findings.
- Chapter five highlights summary of the findings, conclusion and recommendations
Chapter Five
Summary, Conclusion and Recommendations
Introduction
The chapter present the summary of chapters contained in this report. We followed the summary with conclusion and findings drawn from the review literature and the theoretical analysis of examination of risk management and portfolio analysis in the capital market. the chapter was rounded up with recommendation mutually satisfy the needs of consumers and ensure maximally profitable operations by banks.
5.1 Summary
Chapter one of this study contains the introduction and background on the role banking system on the economic development of any nation. It also emphasis on the concept of risk in the capital market which according to CBN in its prudential guidelines means as-hazard experience by as a result of improper check on capital utilization. The statement of problem point out that a system does not exist totally immune to the dynamics of environmental forces most especially the financial institution that operates on speculative arrangement and poses certain questions related to how the manage such uncertainty related to their operations. The main objective of the study is to find and acquire practical means of identifying risks and controlling it using any suitable techniques available. It also contains the significance of the study; the scope of the study is limited to the areas only, and finally a hypothesis and chapter scheme.
Literature review of this study involve a complete diagnosis of the reservoir if information existing in certain books, journals and articles as well as assertion written by various authors which have some relationship with our areas of study. It highlights several ways of identifying and controlling it to minimize to a bearable limit as opine by Shaha (2011), Ernest and Young (1979) Renand and Klinke (1997). Methodology employed by the research work to obtain the necessary data analyzing the data was obtained from the secondary source which includes historical and record studying method. Chapter four deal with data analysis which was obtained during the course of the research work. It contains the interpretation of respondent response to questions in the questionnaires distributed and the discussion of the results well as the testing of hypothesis.
5.2 Conclusion
The study reveals the following finding;
- That banking business is a very risk one, as the planning and control of such phenomenon is very paramount to the operations and survival of the banking institution.
- The study also reveals that risk management in the capital market haves positive correlation with the availability of human capacity.
- The institution selected for the study reveals that its risks management system is adequate and strong enough to minimize (or even total avoidance)inefficiencies and other negative happing in the banks of which only rules and regulation guiding such control are rigorously adhered to.
- Thus an improvement in risk management is believed will greatly improve the level of profitability of Nigeria stock Exchange.
Management of risk needs assurance that a company asset are being properly safeguarded, that reliable information is generated, that operations are running efficiently, that risk managed and that sophistication of financial products and services client are requiring nowadays. These are assumed to be the vision of a good management to control. From the study it was revealed that there was a significant effect between risk management and profitability of capital markets. There was a positive relationship between operational efficiencies and risk management.
However, this system cannot operate efficiently in a vacuum; unfortunately, the prevailing harsh economic situation in the multitude of banks. Nevertheless negative banking cultures and others are not immense to positive changes avoidance, reduction of risk is very important and it is a prerequisite to growth of the banking ministry.
Risk and the like in bank cannot be eradicated completely.
All the same it can be drastically reduced but only if stiffer and understood measures are taken.
The average citizen regrettably, still tends to look upon banking as something unsigned in mystery, and this stresses the need for banks to properly coordinate effort to improve its image in the economy and to restore confidence and trust it assumed before.
5.3 Recommendations
Having examined the issue of risk management and its inadequacies as main causes of ruin in an organization and having examined its effective operation, the empirical findings indicates that the relationship between examination of risk management and banks operational efficiencies and profitability is significant. Thus, the following recommendations have been drawn.
- The Union Bank P.L.C should continue to appraise the risk management apparatus and block all identified hotspots in their system. In this regards other banks especially newly established one should followed their footsteps.
- Bank should provide for adequate salary scale its employees and in improving the conditions of employee and in minimize the pressure which leads employees astray.
- Bank should employ a systematic selection process in recruiting workers.
- Banks should train workers on the important of risk management.
- Banks should improve staff motivation and disobedient staff should be disciplined and reward for faithfully ones.
- Banks should cooperate with the apex bank (central bank of Nigeria) government, and processional bodies concerned with the affairs of examination of risk management in bank.


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