ABSTRACT
This paper sought to investigate portfolio real returns on stocks and bonds in the Kenyan market. Empirical evidence suggests that long-run real return on stocks is higher than long-run real return on bonds. In this paper we examine returns on bonds and stocks at the NSE for the period 1999 to 2006. To be able to compute real returns we incorporated inflation for the same period of time. Further we performed correlation between the real returns on stocks and bonds and regressed real returns on stocks against real returns on bonds, and inflation and real returns on bonds. This gave a regression model relating the given variables. A t-test of means was performed at a significance level at 95%. General findings indicate negative correlation between returns on stocks and bonds. Moreover it was realized that in the long run stocks outperformed bond on returns.
KEY WORDS: portfolio diversification, real returns, stocks, bonds, and inflation