An Evaluation of the Risk and Returns of Equity Mutual Funds in Kenya
Abstract
The study set out to evaluate the relationship between risk (as measured by
both the standard deviation of total return and coefficient of variation) and
net returns of equity mutual funds in Kenya. In addition, the study also
sought to compare the performance of Kenyan equity mutual funds with the
stock market as a whole using the NSE20 share index as the benchmark.
The research study was done over the period 30th May 2003 to 1st july 2005.
In order to achieve these objectives, secondary data was used to generate
each mutual fund's returns and risk. Regression analysis was used to derive
the beta. The coefficient of variation, Sharpe model, Treynor model and the
jensen model were used to determine the relative performance of the sample
mutual funds.
The results of the study indicated that there exists a positive risk-return
relationship which is consistent with the capital market theory and is an
indication that the unit-holders in the equity mutual funds are risk averse.
The risk. adjusted performance measures, showed that the Balanced Fund had
the worst performance when compared to the Equity Fund and the market.
However, both the coefficient of variation and the Sharpe Index indicated that
the Equity Fundrperforrned worse than the market portfolio. While the
Treynor index and the jensen alpha ranked the Equity Fund as having
performed better than the market portfolio as represented by the NSE20
Index. The findings indicate that the investment manager of the Equity Fund,
in an effort to select undervalued securities or to time the market, holds a
portfolio that is less than fully diversified, and as such contains some diversifiable risk .
Citation
Masters of business administrationPublisher
Univesity Of Nairobi Faculty of Commerce, University of Nairobi.