Systematic risk and Un-Systematic risk on financial firms quoted on the Nairobi Stock Exchange

Abstract

The primary motive for buying a stock is to sell it at a subsequently higher price. In many cases, dividends will also be expected. Dividends and price changes are the principal ingredients in what investors regard as return and yield. If an investor had impeccable information and insight about dividends and stock prices over subsequent periods, he would be well on his way to great riches. But the real world of investing is full of political, economic, social and other forces that we do not understand sufficiently to permit us to predict anything with absolute certainty. Forces intermix and flow at cross currents. Nothing is static, creating an element of risk. The risk involved has therefore been categorised into two, Systematic risk and unsystematic risk. This study aims at looking for ways of eliminating risk while investing at the NSE. We intend to use linear regression to determine the value of Beta, which in effect gives a measure of the systematic risk. A well diversified portfolio completely eLimi:;lates-unsystematic risk. The study also aims at comparing the Capital Asset Pricing Model and The Market Model for consistency on establishing the Expected Returns Estimates. -/It was noted .that using the four and a half year data gives results that are statistically significant for the overall Stock Market. The stocks having high beta values also seem to have a high value of the correlation coefficient between the individual stock and the market index. A positive Beta value indicates that a change in the Market Return results to a change in the same direction of the asset return. If we take the Market beta to be equal to 1, then an asset ,with beta value of 1.3 will increase by a factor of 1.3 for every increase in the market return. A decrease in the Market Return would also indicate a decrease in the asset return by the same factor, making it a high risk asset to hold. . The expected returns were estimated using Capital Asset Pricing Model AND also the Market Model The figures obtained using Capital Asset Model were found to be more consistent and linear as opposed to the Market Model