Beta, firm size, book-to-market equity and stock returns: Evidence from the Nairobi Stock Exchange

Abstract

This paper sought to compare the explanatory power of a single index model with the multifactor asset pricing model of Fama and French (FF) (1996) for companies listed in the main investment market segment at the Nairobi Stock Exchange over the years 1999 to 2005. According to the CAPM, the market beta alone is sufficient to explain security returns and that there is a positive expected premium for investing in beta risks. The current consensus is that firm size and book-to-market equity factors are pervasive risk factors besides the overall market factor. The results of the study suggest that the CAPM beta alone is not sufficient to describe the cross section of expected returns. The study finds that the size and book-to-market equity help explain the variations in average stock returns in a reasonable manner.