Estimating the Systematic Return Risk for the Nairobi Stock Exchange

Abstract

The risk and return parameters of a stock market are of great interest not only to investors but to scholars and regulatory authorities among others. They give the "big" picture of the entire market and are therefore useful benchmarks against which to assess the optimality of returns from a security or a portfolio. Of equal importance is the effectiveness of diversification in the market. Portfolio holders are interested il ~he extend to which risk can be reduced through diversification. This study sought to establish the market risk and return for the Nairobi Stock Exchange {N~~ as well as assessing how effective the market . diversifies unsystematic risk. Data on fourty-five companies quoted in the exchange was used to calculate the market parameters. Effectiveness was measured by establishing the proportion of unsystematic risk which was diversified away by the market. Comparison of the market risk and the theoretically expected market risk if full diversification of unsystematic risk had been acheived was done. Portfolio data for the sample companies was also calculated to establish how close it is to the market data. This test was largely intended to give cred~nce (or nullify) the reliance on the market parameters calculated using the sample as good estimates of the full market of fifty seven companies .