Estimating the Systematic Return Risk for the Nairobi Stock Exchange
Abstract
The risk and return parameters of a stock market are of
great interest not only to investors but to scholars and
regulatory authorities among others. They give the "big"
picture of the entire market and are therefore useful benchmarks
against which to assess the optimality of returns from a security
or a portfolio. Of equal importance is the effectiveness of
diversification in the market. Portfolio holders are interested il
~he extend to which risk can be reduced through diversification.
This study sought to establish the market risk and return
for the Nairobi Stock Exchange {N~~ as well as assessing how
effective the market . diversifies unsystematic risk. Data on
fourty-five companies quoted in the exchange was used to calculate
the market parameters. Effectiveness was measured by
establishing the proportion of unsystematic risk which was
diversified away by the market. Comparison of the market risk
and the theoretically expected market risk if full diversification
of unsystematic risk had been acheived was done. Portfolio data
for the sample companies was also calculated to establish how
close it is to the market data. This test was largely intended
to give cred~nce (or nullify) the reliance on the market
parameters calculated using the sample as good estimates of the
full market of fifty seven companies .
Publisher
University of Nairobi, School of Business