Abstract
Among the paramount information in the stock market is the awareness of the systematic risk of stocks which plays essential role in investment choices. This paper measured the systematic risk of seven stocks on the Ghana Stock Exchange (GSE) using monthly closing prices and the 91 day T-bill from the period 2011 to 2015. The CAPM was employed in measuring the systematic risk of the stocks. The results revealed that, CAL, FML and TLW were defensive stocks since each had a market beta less than one (1). PBC, CLYD, EGL and UNIL had the same systematic risk as the market since each recorded a market beta of one (1). All the seven stocks each had a positive market beta implying that they move in a similar manner as the market. The compensation for investing in each of the stock was approximately at 3%. The diversifiable risk associated with each of the stock was very low since few of the returns were scattered along the regression line.
Highlights
Systematic risk is the component of risk that comes as a result of factors that affects the entire market
The main idea of the Capital Asset Pricing Model (CAPM) is that the rate of return on an asset will be equal to the risk free rate plus a risk premium
The highest standard deviation was in TLW (0.926) and the lowest standard deviation was in UNIL (0.270) an indication of the level of risk associated with the stocks
Summary
Systematic risk is the component of risk that comes as a result of factors that affects the entire market. It refers to the variation of return on stocks associated with changes in the return on the market in general. The CAPM and the concept of beta as a measure of systematic risk have numerous practical applications in portfolio management. It gives a rationale for passive portfolio strategy. Sharpe figured out that a portfolio’s expected return hinges solely on its beta and its relationship with the overall market. The CAPM assist in measuring portfolio risk and the expected return associated with it
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