Systematic risk and return analysis on equity securities listed in the Nairobi Stock Exchange

Abstract

This study examines the relationship between systematic risk and returns on equity securities, focusing on companies listed on the Nairobi Securities Exchange (NSE) over the period 2013–2020. Leveraging the Capital Asset Pricing Model (CAPM) and Modern Portfolio Theory (MPT), the research assesses the impact of systematic risk factors—such as Inflation, Interest rates, and Exchange rate fluctuations—on shareholder returns across eight key sectors: Agriculture, Manufacturing, Insurance, Banking, Commercial Services, Finance & Investment, Energy & Petroleum, and Construction & Allied. The findings reveal that sector-specific characteristics significantly influence the risk-return relationship. The Agriculture sector, with a beta of 0.67, was the least volatile, making it an attractive option for risk-averse investors, while the Finance & Investment sector, with a beta of 1.4, exhibited the highest market sensitivity but also delivered the highest returns (18%), appealing to high-risk investors. Safaricom, in the Commercial Services sector, and Centum Investment, in the Finance & Investment sector, emerged as standout performers with exceptional price gains (80% and 75%, respectively) and returns (20% and 18%). Among macroeconomic factors, exchange rates consistently demonstrated a significant influence on sectoral returns, particularly in the Agriculture and Commercial Services sectors, reflecting the impact of currency fluctuations on performance. Inflation had a positive impact in sectors like Agriculture but negatively influenced Commercial Services, while interest rates had limited and sector-specific effects. The study underscores the importance of understanding sectoral dynamics and macroeconomic sensitivities when developing investment strategies. Recommendations include promoting investor education on risk-return tradeoffs, stabilizing exchange rates, and enhancing risk management practices within companies. Future research could explore the impact of unsystematic risk, include additional sectors, and evaluate alternative asset pricing models. These insights provide valuable guidance for investors, policymakers, and companies navigating the NSE’s evolving market dynamics.