Application of capital asset pricing model in asset pricing on the Nairobi Stock Exchange, Kenya
Loading...
Date
2012-01-09
Authors
Nyambura, L. W.
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
The study is a survey on the asset pricing characteristics in the Nairobi Stock Exchange (NSE), with emphasis on the application and evidence of the Capital Asset Pricing Model (CAPM). This is in order to determine the stock returns and hence the estimation of beta coefficients (risk) for the securities listed in the market.
The study's objective was to find out whether the CAPM works in the NSE, as a typical African emerging market. The CAPM offer the ability to predict securities' returns more accurately than common market analysis techniques such as technical and fundamental analysis.
Using a sample of equity stocks traded on the NSE, the study examined empirically the relationship between returns and beta as CAPM stipulates, over the period from January 1997 to December 2003. The evidence supports the hypothesis that, if the market prices the risk variable, then there exists a systematic relationship between the risk variable and average returns. The relationship found is weak with 31.4% of market return explaining a stocks' return. This indicates that CAPM does work in the market but has a low explanatory power as regards risk on stocks traded in the market. As for its applicability, only a few market participants use it in portfolio selection. This outcome however, is essential in investment management that involves matching stock profiles to determine the most optimal set of assets to include in a portfolio. The findings are also useful in performance and project evaluation where equity is an essential part of a company's financial policy
Description
Department of Accounting and Finance, 68p. The HG 5843.N3.N93 2005
Keywords
Capital assets pricing models, Finance--Mathematical models, Nairobi stock exchange