Adedoyin Michael Olayinka



This study evaluates empirically the risk return performance of Nestle Nigeria Plc, relative to the market index (the Nigerian Stock Exchange All Share Index) for the period between 2005 and 2015.To achieve the of objective of the research, annual total returns of the company and the Market are computed from data collected from website of Nestle Nigeria Plc and its annual reports and accounts and website of Nigerian Stock Exchange (NSE). The standard deviation is the method employed to calculate the risk, while simple percentage was used to calculate returns. The result of the study indicates a marginal negative linear relationship between risk and return of Nestle and the Market. Only 4.38 percent of the variation was accounted for by systematic risk (Betas) and 95.6 percent by the unsystematic risk (Alpha).


Investment in shares or in debentures or in real estates, mutual funds or manufacturing concerns and in other forms of investments can be viewed from various perspectives. The meeting point of all of investments however, is explainable within the framework of two concepts namely, the act of sacrificing present consumption and the expectation of gains or returns in future. Since risk and uncertainties are known to be inherent in investments, it is imperative that sound knowledge and planning is required for good investment decisions.

However, studies have shown that investors in equities market in Nigeria and elsewhere, base their investment decisions on bandwagon effect. That is, people invest because other investors are seen to be investing in an industry or firm. For example, investment in banking and oil industries in Nigeria or in earning power of a company, for example Nestle Nigeria Plc or in market size of the company like Dangote Cement Plc and Nigeria Breweries Plc, without measuring the rate of return and risk of the stock.

Bandwagon effect in the Stock Market has it that stocks go up in value when markets have more buyers than sellers. The increased demand allows sellers to wait for a price while buyers compete. When stocks have more sellers than buyers, they go down. The moves gain so much momentum that prices raise or drop sharply in a short period, such as days or weeks. Buyers or sellers jumping on the bandwagon accelerate increase or decrease.


This occurs when a stock has been rising steadily for several weeks or months and then suddenly shoots up quickly. On a stock chart, this creates a very steep climb that rises much more than any other places in the chart. This is evidence of the bandwagon effect. Investor who fear being left out of the winning stock start buying it because they think everyone else is buying and not because of underlying fundamentals of the company that issued the stock. This applies both the market in general to individual stocks. People start making irrational decision to buy.


Here, the bandwagon effect works in reverse. When the blow-off top hits its pinnacle, some sellers start taking profit. Other sellers jump on the bandwagon sensing a reverse in trend. This sell off accelerates when the people who bought the stock for irrational reasons begin to regret their purchases and fear losing their money.  Evidence of this occurs in the sharp down trend that follows the blow-off top.


Indications of the bandwagon effect come from IPOs. If the offering has been well publicized and investors sense that the stock could do very well, they may rush to get on the first day of trading. The idea is that this is the cheapest the stock will ever be once it takes off. This can create demand that temporarily drives the stock up in price it’s followed by a sell-off when cooler have time to value the stock on the company’s profitability and prospect rather than an overabundance of enthusiasm from investors.


 Further proof of the bandwagon effect occurs when a stock suddenly shoots up during the day for no apparent reason. If this sudden rise happens when there has been no news from the company or the financial media, it may be due to day traders trying to profit from a short-term trend. When these day traders take their profit and the stock suddenly drops back down near its opening price, this is evidence of the band wagon effect.


Many people, when they hear about risk, they think automatically about the chance of being defrauded or not getting all their money back, this is capital risk. This capital risk is important but it is not the only type of risk. Other types of risk involve uncertainty and unpredictability. When you make an investment, it can be difficult to say with certainty what you will get back, share prices fluctuate, interest rates vary and inflation, these are risks. Just concentrating on capital risk and ignoring these other risks can mean you are too cautious an approach. Understanding risk means identifying the different types of risk. Then you can pick up tips for minimizing the chances of things going wrong.

The Risks of Different Assets

There are several asset classes that investors can invest in, each of which comes with its own risks. The four main asserts are cash, bonds, property and equities.  Cash is the least risky of the four but tends to deliver low returns, which means the value of money can be eroded in times of high inflation. Bonds are one step up the risk ladder. Issuer of bond can government or company both  government bonds or gilts followed by investment in corporate bonds, where investors can effectively lend money to large companies or government in exchange for a fixed rate of interest. Investing in commercial property, such as offices, supermarket and ware-houses can grow investors’ money through rental income and growth in value of the property invested in, but can be illiquid-meaning, it can be hardtop sell when the investors want to divest or have his money back. Shares (equities) are the riskiest asset class, as stock market can be highly unpredictable.

But some markets are considered riskier than the others. Investing in developed markets such as the United Kingdom and United States of America is considered relatively safe, although these markets contain their share of higher risk options, too, while emerging markets (like China and India) equities are likely to be more volatile. Buying shares in geographical regions less frequented by investors can be expensive and the shares can comparatively illiquid.

Investment Risk Simple Rules

According to Michael Trudeau (2016) in his article on what is investment risk, he opined that the following five rules should guide investors in their investment decisions.

  1. The greater return you want, the more risk you must accept.
  2. The more risk you take with your investments, the greater the chance of losing some or all your initial investment- capital.
  3. If you are saving over the short -term it is wise not to take much capital risk. So what you are investing for and when you will need access to your money will have a big impact on what types of investment are right for you.
  4. If you are investing for the long -term you can afford to take more risk as your money has more time to recover from falls in the market.
  5. Investing in share -based assets has historically proved to be the best way for providing growth that outstrips inflation. There is a risk attached but, when you invest over the long -term, there is more time to recover your losses after a fall in stock market.

Risk is the probability that the possible future outcome may deviate from the expected outcome. In other words, it is a measure of variance between the actual and the expected returns on investment. The higher the degrees of deviation the higher the risk; the probability of the various possible future outcome can be predicted with some degree of confidence from the historical knowledge of the event (Nwude, 2012).

Risk is also as defined risk as volatility of expected returns to the average returns. Thus, the price of stock which tends to rise or fall more than the average stock is considered risky. They even propounded a quantitative measure of risk known as beta or the systematic risk which is a portion of the total risk caused by factors affecting all the securities in the market. The portion of the total risk that is unique to a firm or industry such factors as management capability, capital structure, market share, labour strike etc. is called alpha or unsystematic risk.

Risk therefore implies ignorance of the exact future outcome of events, it nevertheless gives room for predictions with some confidence built on past and existing events.

Risk and expected return are normally directly related, thus the higher the risk associated with an investment, the higher the expected return there from and vice versa. The attitude of investors can therefore be classified as risk prone, risk neutral or indifferent and risk averse. (Ogunpola, 1995).


In finance return is a profit on an investment. Return comprises of any change in value and interest or dividends other form of cashflow which the investor receives from the investment. It may be measured either in absolute terms or as a percentage of the amount invested. The latter is also called the holding period return. A loss instead of a profit is described as a negative return.

Rate of Return

It is a profit on an investment over a period, expressed as a proportion of the original investment. The period is typically a year, in which case the rate of return is referred to as annual return. To compare returns over time periods of different length on an equal basis, it is useful to convert each return into an annual equivalent rate of return or annualized return. This conversion process is called annualisation. The return or rate of return can be calculated over a single period or where there is more than one period, the return and rate of return over the overall period can be calculated, based upon the return within each sub period. Out the various types of rate of return the most relevant to this study are discussed below.

Single Period

The return over a single period is r =          Pt -Pt1


Where Pt is price at the end, including dividend and interest and Pt-1 is the price at the beginning.

For example, if you hold 100 share, with a starting price of #10.0, then the price at the beginning #1000.00. if you the collect 50k per share in cash dividends and the ending share price is #9.80,then at the end you have 100 x 0.50= 50 in cash, plus 100 x 9.80=980 in shares, totaling ending

Price of #1030.00. The change in value is #1030-#1000=#30,

So the return is =      30

1000=   3%


It is converting of a return r to an annual rate of return r where the of time t is measured in years and the rate of return is per year. Without any reinvestment, a return r over a period t is equivalent to a rate of return.



For example,#20,000.00 returned on an initial investment of #100,000.00 is a return of 20%.If the #20,000.00 is paid in 5 annual installments of #4,000.00 per year, with no reinvestment, the rate of return  per year is          =4000


=20%=    4%


Assuming return are reinvested however, due to the effect of compounding, the relationship between a rate of return r and a return  R over a period of time t is

1 + R=

Which can be used to convert the return R to a rate of return r

r =   -1

For example, a 33.1% return over 3 months is equivalent to a rate of

=10% per month with reinvestment.


For ordinary returns, if there is no reinvestment and losses are made good by topping up the capital invested, so that the value is brought back to its starting point at the beginning of each new sub period, the ARITHMETIC AVERAGE RETURN is used. However, with reinvestment of all gains and losses, the appropriate average rate of return is the geometric average rate of return over n periods, which is:

The geometric average return is equivalent to the cumulative return over the whole given period converted into a rate of return per period. In the case where the periods are each a year long and there is no reinvestment of return of returns, the annualized cumulative return is the arithmetic average return. Where the individual sub periods are each a year and there is reinvestment of return the annualized cumulative is the geometric average rate of return.

For example, assuming reinvestment, the cumulative return for annul return:50%, -20%,30% and 40% is   =   (1+0.50)(1+0.20)(1+0.30)(1-0.40)-1

= -0.0640

= 6.40%

and the geometric average is:

= -.0.0164

= -1.64%

This is equal to the annualized cumulative return:

= -0.0164


This is the rate at which an investment generates cashflow above the purchase cost of the investment. The correct measure of total return of any security must incorporate both income and changes in price. It is a percentage measure of investment gain or loss relative to the amount invested (Nwude, 2012).

Today’s security return is given as:

today’s price -yesterday’s price  X 100

Yesterday’s price

and today’s market return as:

today’s index- yesterday’s index   X 100

Yesterday’s index

Risk and expected return are normally directly related, thus the higher the risk associated with an investment, the higher the expected return there from and vice versa. The attitude of investors can therefore be classified as risk prone, risk neutral or indifferent and risk averse. (Ogunpola, 1995).


To know the relationship between risk and return may be a main topic of any investor because investor is always interest to get high return at a low risk. But, if such an investor succeeds to quantify the relationship and its direction, he can manage his investment better. The relationship risk and return means to study the effect of both elements on each other. We measure the effect of increase or decrease risk on return of investment. The following is the main type of relationship of risk and return.

  1. Direct Relationship between Risk and Return.
  • High Risk and High Return. According to this type of relationship, if investor will take risk, he will get more reward. So he invest million, it means his risk of loss is million naira.
  • Low Risk and Low Return. It is also direct relationship between risk and return. If investor decrease investment. It means, he is decreasing his risk of loss at that time, will also decrease.
  1. Negative Relationship between Risk and Return
  • High Risk and Low Return. Sometime, investor increases investment amount for getting high return but with increasing return, he faces low return because it is nature of that project. There is no benefit to increase investment in such a project.
  • Low Risk and High Return.

There are some projects if an investor invests low amount, he can earn high return. For example, Government of Nigeria needs money for emergency and the Government is giving high return on the investor small risk of loss money.

Risk and expected return are normally directly related, thus the higher the risk associated with an investment, the higher the expected return there from and vice versa. The attitude of investors can therefore be classified as risk prone, risk neutral or indifferent and risk averse. (Ogunpola,1995).


There are several ways of measuring return of stocks, portfolios, mutual funds and others be it with one another or with the market in general A simple one is simply to measure return of one stock with another. However, returns by themselves do not account for the risk. If two stocks have the same return but one has lower risk, the stock with the lower risk would be preferable in investment. The followings are among the popular ones.


The Sharpe ratio (Sharpe measure), developed by William. F.Sharpe, is the ratio of a portfolio total return minus the risk-free rate divided by the standard deviation of the portfolio, which is a measure of its risk. The Sharpe ratio is simply the risk premium per unit of risk, which is quantified by the standard deviation of portfolio.

Risk Premium = Total Portfolio -Risk-free rate.

Sharpe ratio = Risk Premium

Standard Deviation of Portfolio return

The risk -free rate is subtracted from the portfolio return because a risk-free asset, often exemplified by the Treasury bill, has no risk premium since the return of a risk-free asset is certain. Therefore, if a portfolio`s return is equal to or less than the risk-free rate, then it makes no sense to invest in the risky assets. The Sharpe ratio measures the performance of the portfolio compared to the risk taken, the higher the Sharpe ratio, the better the performance and the greater the profits for taking on additional risk.

Example: Calculating the Sharpe ratio. If a fund has a return of 12% and a standard deviation of 15% and if the risk-free rate is 2%, then what is its Sharpe ratio?


Sharpe ratio   =          12-2


= 66.7%


While the Sharpe measures the risk premium of of the portfolio risk or its standard deviation, the Treynor ratio popularized by Jack. L.Treynor, compares the portfolio risk premium to the systematic risk of the portfolio as measured by its beta.

Treynor ratio   =Total Portfolio return   –  Risk-free rate

Portfolio Beta

The Beta of the general market is defined as 1, the Treynor ratio of the market is equal to the market return minus the risk-free rate. The Treynor ratio is higher with either higher portfolio returns or lower portfolio betas, so it is a measure of the return per unit risk.

Example: Calculating the Treynor ratio.

If a portfolio has a return of 12% and a beta of 1.4 and if the risk-free rate is2%, then what is its Treynor ratio?

Treynor ratio    = 12-2


= 7.14

Again, if the portfolio has a return of 12% and a beta of 1 and the risk free is still 2% what is its Treynor ratio?

Treynor ratio        =    12-2


=  10

The two portfolios have same returns but portfolio two with lower risk, achieved higher Treynor ratio. Therefore, portfolio two will be more desirable.


Alpha is a coefficient that is proportional to the excess return of a portfolio over its required return or its expected return, for its expected risk as measured by its beta. Hence, alphas determined by the fundamental values of the companies in the portfolio in contrast to beta, which measures the portfolio’s return due to its volatility. Jensen’s alpha developed by Michael C. Jensen uses the capital asset pricing model (CAPM) to determine the amount of the return that is firm specific over that which is due to market volatility as measured by the firm’s beta relation to the market beta.

Jensen’s Alpha = Total Portfolio return – Risk free rate-Portfolio beta x(Market return-Risk free rate)

Jensen Alpha can be positive or negative or zero. Alpha of the market is zero. If the alpha is negative, then the portfolio is underperforming the market and if it is positive is over performing the market and therefore preferable.

Example: Calculating Jensen Alpha

Portfolio A with return rate of 12%, market return rate of 8%, beta 1.4 and risk free rate of 2%. What is the Alpha?


Alpha =  12-2-1.4 x (8-2)

=             10-1.4 x 6

=             1.6

Portfolio B with same variables except that the beta is 1. What is the Alpha?


Alpha =   12-2-1 x (8-2)

=         10-1 x 6

=          4

Portfolio C with same variable except that the beta is 0.8. What is the Alpha?


Alpha                =         12-2-0.8 x (8-2)

=         10-0.8 x 6

=          5.2

Out of the portfolios, portfolio C achieves highest alpha in over performing the market and has the lowest volatility (lowest market risk) of 0.8 beta. Therefore, the most preferable of the portfolios. Portfolio B is 4% higher than the market (as alpha of the market is zero) return with no more volatility due to systematic risk than the general market therefore more preferable than portfolio A.


Beta, also known as the “beta coefficient.” is historical measure of volatility or systematic risk of a security or portfolio or mutual funds in comparison to the market. In other words, beta measures how an asset moves versus a benchmark (that is market index). Beta is calculated using regression analysis and it is the tendency of an investment’s return to respond to swing in the market. By definition, the market has a beta of 1. Individual security and portfolio values are measured according to how they deviate from the market. A beta of 1.0 indicates that the investment’s price will move in correlation with the market. It implies a positive correlation (correlation measures in direction not in volatility) where asset moves in the same direction and the same percentage as the benchmark. A beta of -1.0 implies a negative correlation where the asset moves in the opposite direction but equal in volatility to the benchmark, a correlation between assets. Any beta above zero wound imply a positive correlation with volatility expressed by how much over the number is. Any beta below zero would imply a negative correlation with expressed by how much under zero the number is. For example, a beta of 2.0 or -2.0 would imply volatility twice the benchmark. A beta 0.5 or -0.5 implies volatility one -half the benchmark.


Assuming a company stock with a return of 12% for a beta of 1.5, if the market return for the period is 10%, can this company stock be a good investment? Solution to this is as follows: A beta of 1.5 implies volatility greater than the benchmark; therefore the stock should have had a return of 15% to compensate for the volatility by owning a higher volatility investment. The stock only had a return of 12% which means it is 3% lower than the rate of return needed to compensate for the additional risk. The Alpha for this stock is -3 and it shows it is not a good investment even though the return is higher than the benchmark.


The standard deviation measures the dispersion of data from its mean. In other words, the more the data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation and a less volatile stock would have a low standard deviation. With a portfolio or funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.


Stock Market Index is a measure of the value of a section of the stock market it is computed from the prices of selected stocks (typically a weighted). It is a tool used by investors and financial managers to describe the market and to compare the return on specific investment or the market. The Nigeria All Market index, United of America, NASDAQ Composite and Dow Jones Industrial Average, Britain FTSE 100 are examples of some of these indexes.

There two types of stock indexes. The simple index which is an arithmetical means of all prices as at a given date divided by the arithmetic means of all price at base date. The weighted index uses some weights instead of using prices of stock alone, the weight may be the number of shares in issue(to give market capitalisation) or the trading volume(ICMA ,2016). The market index is the composition of individual listed firms which add up into sectors and the entire sectors into the whole market. The market like each company has its own return, risk and premium which measures the overall performance of the various industries in the whole economy whether it is expanding or it is shrinking.

It is against this background, that this study is carried out to measure performance relationships that exist between risks and return in equity securities relative the market index, using Nestle Nigeria Plc as case study. The outcome of the study will help investors and financial analysts in selection of companies to invest in the Nigerian Stock Exchange and beyond.

This paper is made of five sections. Introduction of the research is the section one, section two reviews the literature report, section three contains the research methodology, section four has the empirical results and analysis of the research and section five concludes the paper.


Several studies have been done and are still on measuring risk return performance of stocks relative to the index on different stock markets, developed; emerging and frontier among them are the following.

Rajagopala N & Elsamma J (2000)work revealed the various risks experienced by investors in corporate securities and the measures adopted for reducing risks. They opined that calculated risk might reduce the intensity to loss of investing in corporate securities. As per their study, many investors are holding shares of those companies that are non- existent at present. They opined that investors may accept risks inherent in equity but they may not be willing to reconcile to the risk of fraud Promoter should not be allowed to loot the genuine investor by their fraudulent acts.

Salman (2002) provides empirical support to the positive and linear relationship between risk and return. While studying the Istanbul Stock Exchange, he finds that the CAPM’s concept is valid and he believes that both risk and return are integrated the information provided to the market. Similarly a positive and significant association between risk and return in the Jordanian Securities Market.

Madhu & Tamimi (2010) while studying the risk -return relation on equity share in Indian Stock Market they found that CAPM held well in Indian Stock Market in explaining the systematic risk and establishing the tradeoff between risk and return. In order to establish the positive risk-return relationship between equity returns and different distributional and financial risk variables.

Abdullahi & Lawal (2012) study revealed that betas of the quoted firms in the Nigeria Stock Market are predominantly positive, which implies little scope for diversification to the market. They discovered different size of risk among firms which ranged from the lowest beta (-0.01) and the highest (1.43).Most firms’ betas in the Market have less than 1 implying low risk level than the Market and conclude that investment in big firm (Blue chip) does not necessarily grant safety of investment and high returns all the time in the Market.

Osamuwonyi & Asien (2012) work provides empirical evidences that a positive relationship exists between security returns and the measured Market betas in the Nigerian Capital Market. This implies that CAPM holds the Nigerian Capital Market, which indicated a linear relationship between returns and betas of portfolio. From their findings, they recommend that investors and portfolio managers should employ best methods in investment management as the market rewards market risks, that quoted companies must be proactive in diversifying unsystematic risks, creatively responding to market risk and that effective economic policies are required to continue to enhance the sovereign risk status of the country as well as that of the firms and industries.

Nwude(2012)in his study, he evaluated the nature of the relationship between risk and return in Nigeria automobile/tyres sector of Nigeria Stock Exchange. The results showed that the unsystematic risk accounted for the variations in the return of quoted firms. The best two stocks in the sector Dunlop Plc and R.T Briscoe Plc underperformed the market on all aspects during the period of study. Based on his findings, he recommends that investors and analysts in the Nigerian Stock Exchange (NSE) will find the betas helpful in assessing systematic risk and understanding the impact market movement can have on the return expected from a share of Nigerian automobile/tyres stocks.

Momcilovic, Njevic &Jovin(2014) work evaluated risk return and performance measures for twelve stocks traded in Belgrade Stock Exchange. Their findings indicate that investment in four stocks provide positive returns with the realized returns exceeding the required returns in the period from January, 2007 to December, 2011.Eight remaining stocks have negative realized returns and negative alpha during the same period. Treynor, Sharp &Jansen performance measure have significant Pearson coefficients. They result in almost the same ranking order at the market and lead to virtually the same investment decision.

Narayanasamy & Thirugnanasoundari (2016) in their studies and consequent analysis of testing the relationship between risk and return in the Indian Stock Market reveals that of all the different risk variables considered in the study, the distributional risk variables, variance, skewness and kurtosis of the return distribution, confirm the working of risk return tradeoff in the Indian context. Also, a positive association was exhibited between the security market return correlation and the average rate of return during the period of study. It also exposes the relation between systematic risk and rate of return on equities in India. The presence of randomness of the return series of both monthly market and monthly security returns in India has proved that the Indian Stock Market is weakly efficient. It is noteworthy to express that the Indian capital market exhibits a positive risk -return relationship


The study is on measuring Nestle Nigeria Plc risk return performance relative to the Market index. The years of study is between 2005 and 2015.In this study, the dependent variable is the rate of return on Nestle(Y) and the independent variable is the rate of return on the Market. (X).

The Nestle Nigeria Plc website and the company annual reports and account provide data for computation of total return on Nestle. The Nigeria Stock Exchange website supplies data for computing rate of return on market. The FGN treasury bill quarterly rates for each year were sourced from the Central Bank of Nigeria website.

The rate of return is calculated as follows:

Pt-Pt-1+Dt   X 100


where Pt is the price of Nestle at the end the of the year less price at the beginning of the year Pt1 plus the dividend paid for the year, divided by Pt1 price at the beginning of the year.

The rate of return on the market is as follows:

NSEindex t-NSEindex t-1 X 100

NSEindex t-1

Where NSEindex t is the NSEindex at the end of the year less NSE indext1 at the beginning of the year divided by NSEindext1at the beginning of the year.

The risk for the year for Nestle and the Market is calculated by using standard deviation method of their respective quarterly (January to December of each year) rates of return.

The method used to arrive at the nature of the relationship between risk and return is the coefficient of correlation (r) and coefficient of determination (r2). For calculation of the relationship between XandY the regression formula was used.

y=a +bx,where a=y-bx andb=or


Table 4.1: Risk -Return Data

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 r r2
Rf 11.9 7.25 7.5 5.98 4.75 9.65 15 11.8 12.5 16 8 -.2094 .0438
Rm 3.28 39.1 -74 250.10 -32 20 -16.4 33.5 44.7 -13.3 -20
Ri 30.6 32.1 22.3 -27.18 33 65 37 68.3 37.9 10.7 -11.7
Rm-Rf -8.58 31.9 -81.5 244.12 -36.7 10.3 -31.4 21.8 32.2 -29.3 -28
Ri-Rf 18.7 24.8 14.8 -33.16 28.2 55.3 22 56.6 25.4 -5.33 -19.7
σi 18.8 16.3 29.2 19.35 30.7 36.2 30.4 112 108 50.5 10.1
σm 1576 4542 5721 11957.02 2740 1299 2210 2874 2327 2883 2206
Ri/σi 162 197 76.6 -140.41 108 179 122 60.9 35.1 21.1 -115
Rm/σm 0.21 0.86 -1.29 2.09 -1.17 1.54 -0.74 1.17 1.92 -0.46 -0.91
β=Ri-Rf/Rm-Rf -219 77.9 -18.2 -13.58 -76.8 537 -70 260 78.8 18.2 70.2
β/σi -1160 477 -62.4 -70.17 -251 1481 -230 232 73 36 692
α 237 -61.5 47.4 32.94 107 -500 100 -148 29.1 32.3 -60.1
α/σi 1260 -377 162 170.17 351 -1381 330 -132 27 64 -592

Source: Computed by Adedoyin, Michael Olayinka 2016.

Market Annual Returns (Rm) and Nestle Annual Returns (Ri)

The annual returns from the market varies from -74 percent in year 2007 to 250.10 percent in year 2008.Nestle returns between -27.18 percent in year 2008 and 68.30 percent in year 2012

The higher the annual return the better the performance. The average percentage annual return for the Market is 21.35 percent while Nestle average annual percentage return is 27.07 percent. Therefore, Nestle outperformed the Market in annual market returns.

Market Annual Risk (Rm/σm)and Nestle Annual Risk (Ri/σi)

The Market annual risk moves from -1.29 percent in year 2007 to 2.09 percent in year 2008. Nestle annual risk varies from 197 percent in year 2006 and -140.41 percent in year 2008. The average annual risk of the Market for the period is 0.29 percent and Nestle 64.13 percent. It is normal for the market risk to be lower than a firm’s risk due to a wide diversified space of the Market. Nestle here under performed the Market in term of annual risk return by being higher than the Market because the lower the better.

Market Risk Premium (Rm-Rf)and Nestle Risk Premium(Ri-Rf).

The Market risk premium varies from -81.5percent in year 2007 to 244.12 percent in year 2008. When compare with -33.16percent in year 2008 and 56.6 percent in year 2012in Nestle risk premium. The lower the risk premium, the better the performance and vice versa. Therefore, in the of risk premium space, Nestle outperformed the Market.

Systematic Risk (β) and Unsystematic Risk (α)

The systematic risk (Beta), varies from -219 percent in year 2005 to 537 percent in year 2010.   The unsystematic risk (Alpha) varies from 237 percent in year 2005 to -500 percent in year 2010. Within the period under study on the average, beta and alpha response to market movement is 110.68 and -10.68 percent respectively. Therefore, the response of beta by positive 110.68 percent and negative (-10.68) percent of alpha to market movement is higher than in beta. Generally, the betas associated with the returns of the firms studied in the Nigerian Stock Exchange are predominantly positive and the positive beta of Nestle conforms with the study of (Abdullahi,I.B. and Lawal,W.A.2012).This implies again, that increase in the Market return translated to increase in Nestle return over the period.

Correlation Coefficient(r) and Coefficient of Determination(r2)

Correlation coefficient (r) values only help to show the strength and direction of relationship between variables x and y, in this case of Nestle and the Market. However, the proportion of level of explanation is not known. It is therefore, necessary to determine the level of explanation called the coefficient of determination. Coefficient of determination is denoted by(r2) otherwise known as explained variation and it is expressed as the ratio of explained variation divided by total variation.

In risk return relationship, the return from Nestle was negatively correlated with -20.9 percent risks and the coefficient of determination of just 4.38 percent. Therefore, it means that only 4.38   percent of the variation in return from Nestle can be explained by the risk while unexplained factors accounted for as 95.62 percent.


This study has evaluated the nature of the relationship between risk and return performance of Nestle Nigeria Plc relative to market index. The result of empirical analysis showed that as expected the market outperformed Nestle in annual risk returns and that the unsystematic risk(Alpha)account higher for the variation than the systematic risk(Betas). However, Nestle outperformed the market in annual return and annual market risk premium. The implication of this, is that an investor in Nestle for past eleven years would have returned higher from this company more than the market. This is contrary to outcomes from similar studies that had been done on firms relative to market index as contained in the literature review. This is largely due to highly diversified nature of Nestle products portfolio and consistent management capability over the years.

Based on the findings and conclusion of the study, it is hereby recommended that investors, portfolio managers, capital market analysts and others should improve the methods they employ in measuring investments as the market significantly rewards systematic risk (Betas). That firm must be proactive in diversifying their unsystematic risk (Alpha) and creatively respond to market as Nestle has been found in this study. Those effective economic policies are required to sustain the sovereign risk status of the country as well as of the firm and industries.


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