Using adjusted historical beta to estimate risk of stocks listed at the NairobiStock Exchange

Abstract

This study was undertaken with a view of establishing whether adjusted historical beta is an accurate measure of risk for stocks listed at the NSE. The study is structured into five chapters. Chapter 1 provides the background of the study. Chapter 2 contains the literature review of the research. Chapter 3 discusses the research methodology employed. Chapter 4 contains data analysis and findings. Chapter 5 provides the conclusion, limitations and suggestions for further research. The study analyzed a sample of 31 companies out of a population of 48 listed companies at the NSE.The research covered a study period of six years from 2001 to 2006. The findings of the study reveal that adjusted historical beta is an accurate measure of risk for stocks listed at the NSE. The study employed beta as a measure of risk. Historical beta was adjusted by the use of Merrill Lynch adjustment formula. A remarkable finding is that the 1st portfolio had an adjusted historical beta for the first period of 2001 to 2003 that was exactly equal to the future beta of the same portfolio for the latter period of 2004 to 2006. The finding confirms that adjusted historical beta is an accurate estimate of future beta and therefore an accurate measure of risk.