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Evaluation of Capital Asset Pricing Model in Predicting Securities Returns at The Nairobi Securities Exchange (Listed Agricultural Companies)

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Document pages: 12 pages

Abstract: The main purpose of this paper was to determine the impact of CAPMs systematic risk on securities returns and to determine the linearity of the risk and the returns. This study was guided by asset pricing theories in place which included the Arbitrage Pricing Model and Markowitz modern portfolio theory. This study targeted all agricultural companies listed and quoted under the NSE of which weekly prices for five years from January 2011 –December 2015 were used. This study used explanatory research design due to its quantitative nature while analyzing and interpreting data by use of statistical package for social science (SPSS) and excel spreadsheets. The findings show that the intercept is significantly not different from zero, for years 2011, 2012, 2013 and 2014 at 5 level of significance implying that the excess of actual returns are explained by the systematic risk while the intercept for year five is significant implying that the securities excess actual returns are not fully explained by the systematic risk. Thus, the five year period CAPM is consequently able to fairly capture the pattern of actual excess returns in the Kenya NSE. The study found out that, higher betas yields to higher return which is consistent with the CAPM model. Thus, the five year period CAPM is consequently able to capture the pattern of returns and risk in the Kenyan perspective despite being non-linear. The significance of this study is that shareholders, corporate managers, financial analysts and other stakeholders will enhance their investment risk management.

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