The effectiveness of the nse 20 share index in representing the overall market performance at Nairobi security exchange

Abstract

The stock market movements are constantly monitored and pursued in the global, regional and local context. Particularly the movement and fluctuations of related standard indices which represent a tool to measure market performance and outcomes of the market in terms of growth are closely evaluated. The indices show registered share prices in the market. Again, they are used as comparable performance indices which investors can use to measure the performance of their portfolios compared to that of the whole market. The NSE 20 share index has been a victim of criticism from majority of investors and investment analysts due to its inherent shortcomings that make it a weak performance measurement indicator. As a result, the NSE introduced the NASI in February 2008 as a complimentary index. The study sought to investigate the effectiveness of the NSE 20 share index in representing the overall market performance at the NSE. The study‟s specific objective is to investigate which of the two indices between the NASI and the NSE share index is a better performance measurement indicator. The sample of the study included all the firms that form the NSE 20 share index and NASI. The index was selected from companies in the NSE from all sectors namely Agricultural, Automobiles and Accessories, Banking, Commercial and Services, Construction and Allied, Energy and Petroleum, Insurance, Investment, Manufacturing and allied and Telecommunication and Technology. This was an empirical study and required secondary data on NASI and NSE 20 share index for the period January 2013 to December 2013 which was obtained from the NSE information centre. Correlation analysis was also carried out to determine if significant correlation exists between the two indices with market performance. From the correlation analysis there is a strong positive correlation of 0.822 between market performance and NASI and a rather stronger positive relationship of 0.861 between market performance and the NSE share index. The findings of the study indicate that there is no significant difference between the two indices also the NSE 20 share index is a better market measurement index compared to the NASI. Generally the NSE is effective as a measure of the market performance although in the future there should be an index to measure each market segment.