An investigation into the relationship between Risk and return of companies listed under the Various market segments: the case of the Nairobi stock Exchange

Abstract

The principal objective of this study was to establish whether there exist any difference in terms of risks and returns of companies listed under the two market segments namely; the Main Investment Market Segment and the Alternative Investment Market Segment at the Nairobi Stock Exchange. These companies had previously operated in the same market under similar requirements until June 2000 when they were re-classified into the two segments i.e. the Main Investment Market Segment and the Alternative Investment Market Segment. The study utilized historical market data collected from the Nairobi Stock Exchange for the period between January 1996 to December 2000. Individual companies' Sharpe Ratios for the entire period were computed and analyzed. Difference between Sharpe Ratios of companies listed under the Main Investment Market Segment and those of companies listed under the Alternative Investment Market Segment were analyzed using Wilcoxon Rank Sum test The research found out that there exist no significant difference in terms of return and risk between those companies listed under the Main Investment Market Segment and those listed under the Alternative Investment Market Segment at the Nairobi Stock Exchange. The research therefore concluded that the companies listed under the two different segments mentioned above are the same in terms of performance as measured by risk and return. In conclusion therefore, the failure by NSE market segmentation to address the interest of the consumer (rational investor) who considers the risk and return performance of the securities as his basis of selecting products (securities), lead to ineffective segmentation