A Study of Portfolio Returns on the Nairobi Stock Exchange Based on the P/B and P/E Ratios
Introduction
Investors can have an idea in the efficiency of the stock market when they realized their gain from the performed active management strategies. In addition, the investors’ attempts to beat the market through the reduction of the returns due to the costs incurred in the management, transaction, taxation, and other related market operations.
Background of the Study and Problem Statement
In the Nairobi Stock Exchange, the investors follow the passive investment strategies to make it possible in beating the market. The importance of the role of the portfolio management is highly anticipated in choosing the right investment that can react on the risk profiles (Clarke, Jandik, and Mandelker, 2002; Ernst & Young, 2008). As the main topic of the research paper, on what ways did the investors realize the portfolio returns and achievement of the market efficiency in the Nairobi Stock Exchange?
Research Objectives
The first objective of the study is to determine the portfolio returns for the investors which are based on the price-to-book ratio and price-to-earning ratios. Second is to determine the efficiency market hypothesis in the accordance of the returns of investments among the investors.
Research Questions
The study recognized the difficulty in analyzing the Nairobi Stock Exchange and thus it provided several questions that can serve as the guidelines in the completion of the study. Moreover, the questions are pertained in the activities or transactions in the investment settings that are suitable to the determination of the study objectives.
1. What are the common activities of the portfolio manager?
2. How can a portfolio manager achieve the optimal portfolio?
3. In the recognition of the portfolio, how can the efficiency in the market as well as the returns be achieved giving the value to the price-to-book and price-to-earnings ratios?
Literature Review
Efficient market hypothesis or (EMH) is identified as the proposition of the current stock prices that can be reflected on the available information about the firms and this enables the firm to earn profit through the utilization of the given information (Clarke, Jandik, and Mandelker, 2002). In this way, the investors cannot make an excess on returns (Aga and Kocaman, 2008). The change of the price of the securities took great effects such as how the changes in the market took place. Most of the business analysts stated that through the value strategies, the market can be outperformed consistently. Through the price-to-book ratios, the stocks can be bought on low prices which are relative on its book values, dividends or historical prices. The results may represent a strong return which might be in contrast on the EMH (Clarke, Jandik, and Mandelker, 2002). But most of the studies identified that in the long-run, the investors can make it possible to acquire the said excess of returns. The investment strategies may result to the excess return in accordance to the diversified portfolios that is entirely based on the price-to-earnings ratio. The long-term investment in the P/E is more effective and can carry-out much of the values (Aga and Kocaman, 2008; Ernst & Young, 2008).
Methodology
The applied method of the study is the use of the comparative case study method. The aid of the past literatures and case studies are sought by the study to meet its objectives. Furthermore, the comparative case study method enables the study to examine, observe, compare, and measure the different transactions within the Nairobi Stock Market. Through the extensive support from the past case studies, the research come up on its own analysis and concluded the other related ideas that will benefit both of the stock market and the investors.
Analysis
The portfolio returns can be achieved through the optimization through the portfolio diversification and asset allocation. The aid of the minimization of investment costs and taxes can make the returns be possible. Portfolio management should have appropriate mixture of the securities should be in accordance of the investor’s age, goals, tax bracket, employment, and the perspective towards the risks. In an efficient market, the competition will cause the full effects of new information on the intrinsic values that are soon being reflected in the actual prices.
Conclusion
Based on the study, the efficiency market hypothesis limits the information on the investors where they can gain the return but with no excess. However, through the use of the P/B and P/E strategies, the portfolio managers experience the great returns. The excess in returns are said to be anomalous for some of the economists because it contradicts the limitations in the efficiency market hypothesis.
References:
Aga, M., & Kocaman, B., 2008. Efficient Market Hypothesis and Emerging Capital Markets: Empirical Evidence from Istanbul Stock Market. International Research Journal of Finance and Economics. [Online] Available at: http://www.eurojournals.com/IRJFE%20ISSUE13%20mehmet.pdf. [Accessed 11 Feb 2010].
Clarke, J., Jandik, T., and Mandelker, G., 2002. The Efficient Markets Hypothesis. [Online] Available at: http://comp.uark.edu/~tjandik/papers/emh.pdf. [Accessed 11 Feb 2010].
Ernst & Young, 2008. Kenya Commercial Bank Limited. [Online] Available at: http://www.kcbbankgroup.com/ke/images/stories/rightsissue.pdf. [Accessed 11 Feb 2010].
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