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Relevance of the Risk-Return Relationship in Investment Decision Making: A Case of Companies Quoted at the Nairobi Stock Exchange during the Period 2002- 2006

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dc.contributor.author Kimani, Angela
dc.date.accessioned 2019-10-02T08:46:45Z
dc.date.available 2019-10-02T08:46:45Z
dc.date.issued 2008
dc.identifier.uri http://erepo.usiu.ac.ke/11732/4889
dc.description A Report Submitted To the School Of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration en_US
dc.description.abstract The risk-return relationship is an important ingredient in optimal portfolio choice, and is central to the development of theoretical models aimed at explaining observed patterns of stock market predictability and volatility. The purpose of the study was to determine the relevance of the risk- return relationship to investment decision making in Kenya with a focus on companies quoted on the Nairobi Stock Exchange (NSE) during the five-year period (2002- 2006). The objectives of the study were: 1. To determine the relationship between risk and return of the quoted companies2. To determine the influence of risk on firm investment behavior during the period under review3. To determine whether beta explains value premium among the quoted companies. The research design adopted for the study was a descriptive research design. Companies quoted at the NSE formed the population of the study. The sampling frame consisted of all the forty- eight companies quoted on the Nairobi stock exchange as at 31 December 2006. The sample was selected using purposive sampling and the sample size was thirty- six. This sample size was arrived at after removing the companies quoted under the Alternative Investment Market Segment (AIMS), those quoted after the year 2002 and those suspended from trading during the five-year period. The study utilized secondary data since the parameters of concern were quantitative variables that are found in the financial statements of the quoted companies. The researcher obtained the data from the financial statements for each of the thirty-six companies and filled out a data sheet for each. This data was analyzed using correlation analysis and weighted averages. The study revealed that the risk and return of the overall market is inversely related. This result was uniform in across all the sectors except Finance and Investment sector that had a positive risk- return relationship. With regard to the influence of risk on firm investment behavior, all the firms the Agricultural and Commercial & Services sectors were risk seeking regardless of their performance, while this was not the case for the Finance & Investment and the Industrial & Allied sectors. In determining whether beta explains value premium among the quoted companies at the NSE, we observed a negative value premium. The value stocks had a higher beta than growth stocks but they yield lower returns than the growth stocks. We concluded that there was a significant negative relationship between the risk and return of the companies quoted at the NSE as at 31 December 2006. The effect of risk of a company on its investment behavior was dependent on the sector in which it was operating. There was a negative value premium at the NSE and it did not compensate for the differences in the Seta between value and growth stocks. We recommend that, for any investment decision, an investor should pay attention to the sector specific risk- return attributes and with the overall market risk- return Characteristics acting as a guide. The influence of risk on firm investment behavior is dependent on the sector in which it is operating; therefore, an investor should consider the sector in which a company is operating when seeking to understand its investment behavior while faced with risky choices. Finally, the value premium observed on the NSE does not compensate the differences in beta of value and growth stocks. Therefore, an investor may not possess a distinct advantage in holding value stocks. In addition, further research should be carried out on the determinants of investment decision making in Kenya. en_US
dc.language.iso en en_US
dc.publisher United States International University - Africa en_US
dc.subject Risk --return, Investment, Decision Making en_US
dc.title Relevance of the Risk-Return Relationship in Investment Decision Making: A Case of Companies Quoted at the Nairobi Stock Exchange during the Period 2002- 2006 en_US
dc.type Thesis en_US


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