Portfolio Return Charactrestics of Different Market Sectors at the Nairobi Stock Exchange
Abstract
This study compares the portfolio stock return characteristics of different market
sectors at the Nairobi Stock Exchange from January 1997 to December 2001.
We begin by examining the average returns of each of the stocks in the
Agricultural, Commercial, Financial and Industrial market sectors, without
considering the risk level of each of the stocks included in the sample. We then
factor in risk dimension into the analysis, both at the individual stock and portfolio
levels.
The analysis of sectoral portfolio return characteristics does indicate that there
are"significant differences between sectors in terms of their risk-return
relationships. The portfolio return characteristics do not only differ across sectors
but also from one period to the other. These differences were intermittent. The
existence of these risk-return differences is a manifestation of the inherent
differences in market conditions and sector characteristics.
Empirical evidence suggests that stock returns across market sectors are not
uniform. According to Fama and French (1992, 1996), much of the cross
sectional variation in equity returns can be explained by firm characteristics such
as market capitalization, price-to-earnings ratios, change in operating earnings
and book-to-market ratios. They examine many of these factors simultaneously
and conclude that size and book-to-market, explain the majority of the cross
sectional variation in stock returns.
The differences observed in our study were significant enough to influence
investor choice while determining which stocks to include in the investment
basket and their respective proportions.
Citation
Masters in Business AdministrationPublisher
University of Nairobi School of Business, University of Nairobi