Market Risk Premium

From Jan 2000 to Jul 2007 treasury bills returned an annualized average of 7.77%. Over the same period the NSE Index's monthly return annualized average was 11.68%. While this period is not long enough to capture full economic cycles it implies that the market risk premium on the NSE is 3.91%

This number surprises me given that the comparable market risk premium in the US is approximately 6%.

Another reason why this astounds me is that it implies -- if we apply CAPM -- that the cost of equity is less than the cost of debt for many companies. Wow.

Here's the table

STOCK	BETA	Cost of Equity
NATIONAL BANK	1.85	11.2%
SASINI TEA & COFFE	1.78	10.9%
NATION MEDIA GROUP	1.71	10.6%
KP&L	1.61	10.2%
SAMEER AFRICA LTD	1.52	9.9%
BARCLAYS BANK KENYA	1.43	9.5%
ICDCI	1.41	9.4%
KCB	1.40	9.4%
NIC	1.34	9.2%
EAST AFRICAN CABLE	1.29	9.0%
GEORGE WILLIAMSON	1.22	8.7%
DIAMOND TRUST	1.19	8.5%
KENYA AIRWAYS	1.16	8.4%
STANDARD CHARTERED BANK KENYA	1.15	8.4%
CMC HOLDINGS	1.14	8.4%
STANDARD NEWSPAPER	1.11	8.3%
JUBILEE HOLDINGS LTD	1.06	8.1%
CROWN BERGER	1.05	8.0%
NSE INDEX	1.00	7.8%
MUMIAS SUGAR	0.97	7.7%
EQUITY BANK	0.94	7.6%
CFC BANK	0.93	7.5%
CITY TRUST	0.93	7.5%
BAMBURI CEMENT LTD	0.92	7.5%
EXPRESS KENYA LTD	0.92	7.5%
BAT KENYA	0.87	7.3%
ATHI RIVER MINING	0.85	7.2%
KAKUZI	0.82	7.1%
HFCK	0.81	7.1%
KENGEN	0.72	6.7%
REA VIPINGO	0.70	6.7%
ACCESSKENYA	0.68	6.6%
SCAN GROUP	0.67	6.5%
CAR & GENERAL	0.66	6.5%
UNGA GROUP	0.64	6.4%
KENYA OIL	0.58	6.2%
TOTAL KENYA	0.54	6.0%
TPS EASTERN AFRICA	0.51	5.9%
EVEREADY	0.49	5.8%
UNILEVER TEA KENYA	0.43	5.6%
EAST AFRICAN PORTLAND CEMENT	0.43	5.6%
OLYMPIA CAPITAL HOLDINGS	0.40	5.5%
EAST AFRICAN BREWERIES	0.39	5.4%
PAN AFRICA INSURANCE	0.20	4.7%
EAAGADS	0.15	4.5%
KAPCHORUA TEA	0.15	4.5%
MARSHALLS E.AFRICA	0.03	4.0%
KENYA RE-INSURANCE	(0.42)	2.3%
A BAUMANN & CO	(0.74)	1.0%

The Beta of Stocks on the NSE

In order to calculate the expected return on a stock I needed to calculate the beta of individual stocks.

Taking the daily closing stock prices over the last year I calcluated Beta as the covariance between the security's daily return and the market's daily return divided by the variance of the market return.

STOCK	BETA
NATIONAL BANK	1.85
SASINI TEA & COFFE	1.78
NATION MEDIA GROUP	1.71
KP&L	1.61
SAMEER AFRICA LTD	1.52
BARCLAYS BANK KENYA	1.43
ICDCI	1.41
KCB	1.40
NIC	1.34
EAST AFRICAN CABLE	1.29
GEORGE WILLIAMSON	1.22
DIAMOND TRUST	1.19
KENYA AIRWAYS	1.16
STANDARD CHARTERED BANK KENYA	1.15
CMC HOLDINGS	1.14
STANDARD NEWSPAPER	1.11
JUBILEE HOLDINGS LTD	1.06
CROWN BERGER	1.05
NSE INDEX	1.00
MUMIAS SUGAR	0.97
EQUITY BANK	0.94
CFC BANK	0.93
CITY TRUST	0.93
BAMBURI CEMENT LTD	0.92
EXPRESS KENYA LTD	0.92
BAT KENYA	0.87
ATHI RIVER MINING	0.85
KAKUZI	0.82
HFCK	0.81
KENGEN	0.72
REA VIPINGO	0.70
ACCESSKENYA	0.68
SCAN GROUP	0.67
CAR & GENERAL	0.66
UNGA GROUP	0.64
KENYA OIL	0.58
TOTAL KENYA	0.54
TPS EASTERN AFRICA	0.51
EVEREADY	0.49
UNILEVER TEA KENYA	0.43
EAST AFRICAN PORTLAND CEMENT	0.43
OLYMPIA CAPITAL HOLDINGS	0.40
EAST AFRICAN BREWERIES	0.39
PAN AFRICA INSURANCE	0.20
EAAGADS	0.15
KAPCHORUA TEA	0.15
MARSHALLS E.AFRICA	0.03
KENYA RE-INSURANCE	(0.42)
A BAUMANN & CO	(0.74)

Kenyan Treasury Bill Yields

I am trying to determine the cost of equity on the Nairobi stock market using the capital asset pricing model (CAPM).

CAPM states that investors expect (demand?) to receive a return equal to:
Risk Free Rate + Beta(Market Return - Risk Free Rate)

Clearly one of the first things that I need to determine is Kenya's risk free rate. Alas the Central Bank's website provides the information that I need. This chart shows the monthly average and 12-month moving average of 91-day T-bill yields.

There are interesting observations from this information. The current economic boom is arising because the government is not providing banks and other institutions with an attractive place to park their assets. If one is able to get 25% risk-free what would they have to demand to assume the extra risk inherent in consumer and business lending?