An empirical investgation in to the risk return relationship among Kenyan publicly quoted companies

Abstract

The relationship between risk and return is of immense interest not only to scholars but to ordinary people too. It is for this reason that this subject has received rigorous research attention from a diverse spectrum of researchers. In Kenya very little has been done to ascertain the nature of this relationship. This research gap was the main driving force behind this research. Usi~g market data from forty-five publicly quoted companies, this research sought to determine the relationships between systematic risk and returns and unsystematic risk and returns. Data collected in the form of quarterly stock prices and dividends was transformed into quarterly returns. Risk parameters were then computed using returns for the period 1979 to 1987 by use of the simple linear regression model. Return parameters were computed for the period 1984 to 1988. A replication procedure was utilized so as to produce five sets of risk coefficients and fifteen sets of return param~~ers. Correlation. analysis was finally carried out using Spea~fuan~~ nOAParametric!test statistic so as to determine the nature of the relationship. tive The results of this study indicate that there exists a posi- (albeit statistically insignificant) relationship between systematic risk and returns. These results tend to support finance theory which states that investors are rewarded via high returns for taking on high risks. The relationship between unsystematic risk and returns is negative and also statistically insignificant which again is in conformity with finance theory. Despite the short time period chosen for the study, it is apparent that the concept of risk-return tradeoff holds for companies quoted on the Nairobi Stock Exchange. However, the lack of strong correlations between systematic risk and returns indicate that there is either under or over-compensation for taking on high risks. This is hardly surprising, given that the Stock Exchange is not perfect. More important however, the results of this study underscore the need for risk analysis by investors, rather than taking high risks blindly with the hope of getting high returns. .;