📄 Abstract
This study examined the relationship between equity risk and financial performance of commercial banks in Kenya. Despite ongoing regulatory reforms by the Central Bank of Kenya (CBK), the banking sector continues to experience fluctuations in profitability, raising concerns regarding the role of market risk exposures in shaping financial outcomes. Equity risk, which arises from volatility in stock prices and changes in market valuations of equity investments, remains a critical determinant of bank performance through its influence on investment income, capital gains, and portfolio valuation. The study was anchored on the Modern Portfolio Theory, which posits that rational investors and financial institutions optimize returns by balancing risk and return through diversification and efficient portfolio allocation. A longitudinal research design was adopted, covering all 38 commercial banks licensed by the CBK over the period 2020–2024. Secondary data were obtained from audited financial statements and annual reports. Data analysis was conducted using descriptive statistics and panel multiple linear regression using STATA 15. The empirical results revealed that equity risk has a positive and statistically significant relationship with financial performance (β = 0.0964, p < 0.001). This finding suggests that higher exposure to equity markets is associated with improved financial performance, consistent with the risk–return trade-off principle. The results further imply that banks that strategically engage in equity investments tend to achieve higher returns, provided risk is adequately managed through diversification and portfolio optimization strategies. The study concludes that equity risk is a significant determinant of financial performance among commercial banks in Kenya. It recommends that banks adopt balanced equity investment strategies that optimize returns while maintaining acceptable risk exposure levels. Strengthening portfolio diversification and enhancing equity market analytics are also essential for improving performance outcomes.
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📚 How to Cite:
Wilson Ronoh, Prof. Williter Rop, Dr. Raymond Kemboi , RELATIONSHIP BETWEEN EQUITY RISK AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA , Volume 13 , Issue 6, June 2026, EPRA International Journal of Economics, Business and Management Studies (EBMS) , Pages: 65 - 70 , DOI: https://doi.org/10.36713/epra30307