RISK-RETURN RELATIONSHIP AND DIVERSIFICATION (RESIDENTIAL REAL ESTATE AND FINANCIAL ASSET INVESTMENTS

ABSTRACT
At any given time there will be a stock of investment in existence. Some investors may want to turn their investment back to cash and conversely some holding cash may wish to invest it. The function of investment is to therefore reconcile these two opposing activities. There are several alternatives that an investor can be faced with and some of the available include; Real estate investment which includes residential, commercial, industrial investments, investments in cash and money securities, stocks and shares, bonds, treasury bills, insurance policies and tangible investments. Large sums of money are committed into massive projects that eventually results less returns than those expected at the beginning or no returns at all. It is out of this background that this study is undertaken to analyze returns in a given property market and their respective risks over a given period of time and also analyze returns of financial asset market and their respective risk over the same period.
The returns from the two markets are regressed against inflation,-an economic indicator to see how much it (inflation) affects the returns from the two markets. This study was taken within period October 2012 to May 2013 with the aim of evaluating risk and return in residential property market and that of the financial assets. The objectives of the study are; to understand what return is and how return is measured, know what risk is and how it can be quantified, describe measures for assessing and measuring risk of a single asset, and correlate the returns from the two markets with inflation and compare the relationship and recommend from findings of the study
In an attempt to achieve the above objectives, a case studies where chosen by random sampling for the residential properties. Five properties were chosen whereas those of data for the financial asset market were obtained through filling in of questionnaires administered to various stakeholders in Nairobi securities exchange.
From this study it evident that investments with higher risks, have got higher returns and at the same time returns from residential property investment were more secure as they had less risks as compared to returns in the financial asset market. It is also evident that during the period 2007 to 2011 the relationship between financial asset returns and inflation is stronger as compared to the relationship of residential property returns and inflation.
It is recommended that investors incorporate diversification in their invest decisions as to reduce risks facing their capital.