Systematic Risk and Performance of Stock Market in Kenya

Abstract

Stock prices in Kenya have been experiencing drastic volatility over the years. In the year 2015 alone, the value of the listed companies shrunk by about 2.5 billion USD, representing about 25% of the national government annual budget. The performance of the stock market is an important proxy of a country’s economic environment. Rational investors constantly value and revise their portfolio composition so as to maximize their wealth. Whereas effectively diversified portfolio minimizes the unsystematic risk, systematic risks cannot be managed by simple diversification. Investors, therefore, need to understand the effect of these systematic risks on the stock performance. The study sought to determine the relationship between systematic risk factors using Inflation and interest rates and the performance of the stock market in Kenya. The study adopted a positivist philosophy and employed a correlation research design. The study targeted all the stock listed in the Nairobi Securities exchange. The study was underpinned by the Efficient Market Hypothesis, Arbitrage Pricing theory, and used integration analysis to establish the relationships between the variables of the study. The study found a significant long-run positive relationship between interest rate, inflation, and performance of the stock market in Kenya. Investment firms, the financial analyst should use past data on 91 Treasury bills rate and Inflation, to predict the future performance of stock exchange for the benefit of investors.