Relationship Between Risk and Return of Stocks Listed at the Nairobi Securities Exchange

Abstract

Every financial decision contains an element of risk and an element of return. The relationship between risk and return exists in the form of a risk-return trade-off, by which it is meant that it is only possible to earn higher returns by accepting higher risk. This risk-return trade off is central to investment. This study sought to establish the relationship between risk and return of stocks listed at the Nairobi Securities Exchange during the period 1st January 2009 to 6th June 2014. Descriptive research design was employed and the study population consisted of all the companies listed in the Nairobi Securities Exchange. The return of the stocks of the companies that made up the 20 Share Index, the return of the market and the Beta of the stocks were calculated. The research findings revealed the existence of a statistically significant weak negative relationship between risk and return for stocks listed on the Nairobi Securities Exchange. These findings go against the fundamentals of finance that the higher the risk the higher the return. They show an underdeveloped market where the fundamentals of finance do not hold. A lot needs to be done to develop the Nairobi Securities Exchange as a market. It needs to get bigger in size and it should also offer more products. NSE needs to increasingly play an educational role and embark on a vigorous campaign to market itself and educate prospective investors about the opportunities available in the market and how to effectively make use of them. The efforts by NSE and CMA to improve public awareness of the opportunities available in the capital markets in Kenya need to be supported by using a variety of means of communication such as media campaigns either done through the radio, television and newspapers, engaging in personal meetings with eligible firms and potential investors, and distribution of reading materials to firms and prospective investors across the country. The NSE and CMA should build a list of potential issuers of both shares and debt and educate them so as to improve their awareness of the benefits and relevance of capital markets for their operations. In addition the two institutions should set up branch offices at the county levels to facilitate outreach to the public. Investor education may also be done through incorporating information on investment and the capital markets in the school and college syllabus to enhance the awareness by the younger people of Kenyans who make up a sizable proportion of the total population.