Risk - return profile for companies quoted at the Nairobi securities exchange

Abstract

The Nairobi Securities Exchange is the key exchange market for stock trading in the East and Central Africa region. Having moved from floor trading to the modern electronic trading system, the NSE was restructured to include particular sectors with respect to economic activities. The objective of the study was to establish the risk-return profiles in various sectors of NSE. Using empirical data, forty three (43) companies were selected to comprise the sample of study for the period January 2007 to December 2011, but only 34 four were consistently participating in securities market activities. Historical monthly stock price data was used, translating into 60 sample months for use in data analysis. Dividend Growth Model by Gordon was applied while using Sharpe ratios to assess sector riskiness. Initial analysis on the sectors riskiness based on standard deviation and beta computations indicated that the Agricultural sector was the least risky while the Industrial sector was the most risky. However, final analysis using Sharpe ratios indicated that Agricultural sector had the highest Sharpe ratio at 3.756 and thus the most risky among the 4 sectors while Industrial Sector had the lowest Sharpe ratio of 1.553 and therefore the least risky. To resolve the mixed results, a t-test was applied with mean variances per sector tested against the market variances. The analysis concluded that Standard deviations, Betas and Sharpe ratios from the 4 sectors of MIMS were not statistically different from from the market mean variations during the period under study January 2007-December 2011 implying least trade-