Abstract:
Generally speaking, every investment decision contains a component
of risk and a component of return. The relationship amongst risk and return
exists as a risk-return trade off, by which it is implied that it is just conceivable
to obtain higher returns by tolerating higher risk. This risk-return relationship
is very key in investment assessment. Risk and Return are emphatically
connected; an expansion in one is joined by an increment in the other. Hence
this study assessed the risk and return relationship of listed firms on the Ghana
Stock Exchange from 1990 to 2011. Capital Asset Pricing Model (CAPM) was
adopted and modified with an introduction of crises effect and the January
effect. Data of daily stock prices were obtained from the Data Bank Research
Unit whilst, the daily market returns was obtained from the Ghana Stock
Exchange and processed with eviews and excel. The findings of the study
showed that the stocks of ABL, ETI, FML, GCB, SCB, SG-SSB, TOTAL,
GGBL and UNIL, and SIC had their betas predicting their returns in
conformity with the position of CAPM. Other factors other than the beta
contributed to the risk return relationship of the stocks of AADS, CFAO,
CMLT, EBG, HFC, MLC, PKL, PZC, TBL. Stocks of AGA, BOPP, CAL,
GOIL, CLYD, CPC, GOIL,GSR, GWEB, SPL and so on were at variance
with CAPM. The recent financial crisis had downward significant effect on the
beta of ABL, ETI, FML, SCB, SG-SSB, TOTAL, GGBL and UNIL and an
upward significant effect on the betas of GCB and SIC . The January effect
had upward significant effect on the beta of ABL, ETI, FML, SCB, SG-SSB,
and GCB and a downward significant effect on the betas of GGBL, UNIL and
SIC. In all the betas of firms in the financial industry were most affected by
both Financial Crisis and the Calendar Month Anomaly hypothesis. It is
recommended that, first, investors on the stock market should take into
consideration both 2007/8 Global Financial crisis and the January effect when
assessing risk-return relationship. Moreover, once the CAPM predicted the
risk-return relationship of 10 stocks analysed, investors could rely on the
preposition of CAPM in valuing their expected returns in such stocks.
However, investors should not rely solely on CAPM but should use it together
with other valuation models to give better predictions.
