An assessment of the relationship between risk and return at the Nairobi securities exchange using the downside risk capital asset pricing model

Abstract

This study was conducted with the aim of determining whether the D-CAPM accurately predicts the behavior of returns on the Nairobi Securities Exchange. The study was a time series analysis using data for the five-year period between January 2010 and December 2014. 47 out of 62 companies were studied depending on the availability of data. The data was analyzed by way of comparing returns as predicted by the D-CAPM against the actual returns of each company. The comparison was done using the Z-scores at 95 percent confidence level. The results indicate no significant difference between the actual and predicted returns for each of the 47 companies studied. The D-CAPM can, therefore, be applied as a model to predict the behavior of returns on the NSE. With this in mind, this study recommends that the investors on the NSE focus more on the downside returns for both the market and individual firms for these influence investment behavior more than the upside returns. The study recommends the use of the D-CAPM to assess the risk-return relationship on the NSE.