Selecting for Superior Return on the JSE

Abstract

Academic books suggest that there is a correlation between risk and return. In this study companies listed on the Johannesburg Stock Exchange were reviewed over a ten year period. Risk measures (standard deviation and beta) were calculated over the first five years for each company. The correlation coefficient between the risk and return for the following five years was calculated. (r = -0.1296, not significant at a 5% level of significance). The difference in return between the high risk and low risk samples is not significant (t = -1.2069).

The study also looks at firm size and the book to market ratio, to determine if those factors are predictors of returns. A significant negative relationship was found between Firm Size and Return (r = -0.1995, which is significant at a 5% level). Small firms significantly outperformed large firms. It is recommended that investors should use firm size when making investment decisions.

Keywords: Risk return relationship, market capitalisation, Book to market value

JEL Classification: G11