A Test of Relationship Between Stock Market Price Volatility and Unit Trusts Returns

Abstract

The recognition and increasing importance of unit trusts as an investment instrument has spurred research on their performance. The objective of this research paper was to test the relationship between stock market price volatility and unit trust returns. This study used risk adjusted returns of unit trusts using Sharpe’s index which is based on total risk and Treynor’s index which uses systematic risk. Companies participating in equity based unit trusts in the Kenya financial Markets between the period 2005 to 2010 were taken into consideration while the NSE 20 share index is used as the proxy index. This benchmark was chosen because it matches trading objectives of equity based mutual funds. By the end of year 2010, 12 companies were trading in unit trusts though there were fewer companies in this market before then. For the purpose of this research project, Net Asset Value information which represents buying prices of units was made available by the Planning, Policy and research department of the Capital Markets Authority. The findings of this study conclude that the volatility of the stock market transcends to the unit trusts. However the unit trusts performance did not surpass that of the stock market. From year 2005 to 2010 the unit trusts portfolio underperformed the stock market. This is clearly demonstrated by the rankings of Sharpe’s and Treynor’s indices which show that the stock market had superior risk adjusted returns compared to the unit trusts portfolio.