Return on Investment

[pic]
- 7-
© 2010 PK Mwangi Global Consulting
[pic]
- 7-
© 2010 PK Mwangi Global Consulting
Of the stocks that outperformed the benchmark index in all three periods, only Bamburi Cement Ltd.,
Equity Bank Ltd. and TPS (Serena) Ltd. showed PE ratios of above 20 but only in two of the three
periods (see Table 2). Despite showing very high PE ratios in periods I and II3, Housing Finance Ltd. and
Nation Media Group Ltd. underperformed the NSE-20 index in all three periods.
Crown Berger Kenya Ltd. and Olympia Capital Holdings Ltd. also showed high PE ratios in period I but
underperformed the benchmark index in all three periods. Despite low PE ratios averaging 4, 2 and 5
respectively in the three periods, Car & General Ltd., Kakuzi Ltd. and Kapchorua Tea Company Ltd.
outperformed the benchmark index in all three periods (see Table 1). Thus a momentum strategy
involving picking ‘glamour’ stocks with high PE ratios would have been unable to outperform the NSE-
20 index in the three periods covered.
From the observed data, a strategy to outperform a buy-and-hold strategy (based on the NSE-20 index)
would have had to select stocks across sector and size4. Also such a strategy would have had to, ex-ante,
discriminate between eventual strong and weak companies. In picking strong companies a strategy to
outperform the benchmark index would have had to discriminate between companies within sector
especially in the Banks, Financials and Agriculture sectors where some outperformed the benchmark
index while others under-performed it5. And even among the strong companies6 not all were able to
outperform the benchmark index.
Analysis and Interpretation
Risk-return premia
Value investors seek to benefit by purchasing undervalued stocks and selling these once the prices move
towards their intrinsic values. Momentum investors, for their part, expect recent stock price trends to
continue and favour growth stocks- those which exhibit continued price increases... [continues]

Read full essay