risk & return of selected company securities traded in BSE Sensex

Analytical study on the risk & return of selected company securities traded in BSE Sensex

INTRODUCTION

Any rational investor, before investing his or her invertible wealth in the stock, analyses

the risk associated with particular stock. The actual return he receives from a stock may vary

from his expected return and the risk is expressed in terms of variability of return. The down

side risk may be caused by several factors, either common to all stock or specific to a particular

stock. Investor in general would like to analyze the risk factors and a through knowledge of the

risk help him to plan his portfolio in such a manner so as to minimize the risk associated with

the investment.

RISK & RETURN:

Investment decisions are influenced by various motives. Some people invest in a business

to acquire control & enjoy the prestige associated with in. some people invest in expensive

yachts & famous villas to display their wealth. Most investors, however, are largely guided by

the pecuniary motive of earning a return on their investment. For earning returns investors have

to almost invariably bear some risk. In general, risk & return go hand in hand.

Sometimes the best investments are the ones you don't make. This is a maxim which

best explains the complexity of making investments. There are many investment avenues

available for investors today.

Different people have different motives for investing. For most investors their interest

in investment is an expectation of some positive rate of return. But investors cannot overlook

the fact that risk is inherent in any investment. Risk varies with the nature of return

commitment. Generally, investment in equity is considered to be more risky than investment in

debentures & bonds. A closer look at risk reveals that some are uncontrollable (systematic risk)

and some are controllable (unsystematic risk).

CMR CENTER FOR BUSINESS STUDIES1


RETURN:

Return is the primary motivating force that drives investment. It represents the reward

for undertaking investment. Since the game of investing is about returns (after allowing for

risk), measurement of realized (historical) returns is necessary to assess how well the

investment manager has done.

In addition, historical returns are often used as an important input in estimating future

prospective returns.

Components of Return:

The return of an investment consists of two components.

Current Return:

The first component that often comes to mind when one is thinking about return is the

periodic cash flow, such as dividend or interest, generated by the investment. Current return is

measured as the periodic income in relation to the beginning price of the investment.

Capital Return:

The second component of return is reflected in the price change called the capital

return- it is simply the price appreciation (or depreciation) divided by the beginning price of the

asset. For assets like equity stocks, the capital return predominates.Thus, the total return for any

security (or for that matter any asset) is defined as:

Total Return = Current return + Capital return

The current return can be zero or positive, whereas the capital return can be negative,

zero, or positive.



RISK AND RETURN ANALYSIS

RISK:

Investor cannot talk about investment returns without talking about risk because

investment decisions invariably involve a trade-off between the risk & return. Risk refers to the

possibility that the actual outcome of an investment will differ from its expected outcome.

More specifically, most investors are concerned about the actual outcome being less

than the expected outcome. The wider range of possible outcomes, the greater the risk.

Investments have two components that create risk. Risks specific to a particular type of

investment, company, or business are known as unsystematic risks. Unsystematic risks can be

managed through portfolio diversification, which consists of making investments in a variety of

companies & industries. Diversification reduces unsystematic risks because the prices of

individual securities do not move exactly together. Increases in value & decreases in value of

different securities tend to cancel one another out, reducing volatility. Because unsystematic

risk can be eliminated by use of a diversified portfolio, investors are not compensated for this

risk.

Systematic risks, also known as market risk, exist because there are systematic risks

within the economy that affect all businesses. These risks cause stocks to tend to move

together, which is why investors are exposed to them no matter how many different companies

they own.

Investors who are unwilling to accept systematic risks have two options. First, they can

opt for a risk-free investment, but they will receive a lower level of return. Higher returns are

available to investors who are willing to assume systematic risk. However, they must ensure

that they are being adequately compensated for this risk. The Capital Asset Pricing Model

theory formalizes this by stating that companies desire their projects to have rates of return that

exceed the risk- free rate to compensate them for systematic risks & that companies desire

larger returns when systematic risks are greater. The other alternative is to hedge against



systematic risk by paying another entity to assume that risk. A perfect hedge can reduce risk to

nothing except for the costs of the hedge.

The market tends to move in cycles. A John Train says:

“You need to get deeply into your bones the sense that any market, & certainly the

stock market, moves in cycles, so that you will infallibly get wonderful bargains every few

years, & have a chance to sell again at ridiculously high prices a few years later.”

Systematic Risk:

There is some risk, called systemic risk that you can't control. But if you learn to accept

risk as a normal part of investing, you can develop asset allocation and diversification strategies

to help ease the impact of these situations. And knowing how to tolerate risk and avoid panic

selling is part of a smart investment plan. The systematic risk is caused by the factors external

to the particular company and uncontrollable by the company. These are market risks that

cannot be diversified away. Interest rates, recessions & wars are examples of systematic risk.

The systematic risk is further subdivided into three types.

1. Market risk

2. Interest rate risk

3. Purchasing power risk

1. Market Risk:

This is the possibility that the financial markets will drop in value and create a ripple

effect in your portfolio. For example, if the stock market as a whole loses value, chances are

your stocks or stock funds will decrease in value as well until the market returns to a period of

growth. Market risk exposes you to potential loss of principal, since some companies don't

survive market downturns. But the greater threat is the loss of principal that can result from

selling when prices are low.

2. Interest rate risk:



This is the possibility that interest rates will go up. If that happens, inflation increases,

and the value of existing bonds and other fixed-income investments declines, since they're

worth less to investors than newly issued bonds paying a higher rate. Rising interest rates also

usually mean lower stock prices, since investors put more money into interest-paying

investments because they can get a strong return with less risk.

3. Purchasing power risk:

Variations in the return are caused also by the loss of the purchasing power of currency.

Inflation is the reason behind the loss of the purchasing power. Purchasing power risk is

probable loss in the purchasing power of returns to be received.

Inflation may be demand pull or cost push inflation. On demand pull inflation the

demand for goods and services are in excess of their supply. At full employment level of

factors of production, economy would not be able to supply more goods in short run and the

demand for the products pushes the price upwards. The equilibrium between the demand and

the supply is attained at the higher price.

The cost push inflation as the name itself indicates that the inflation or the raise in the

price is caused by the increase in the cost. The increase in the cost of raw material, labour and

equipment makes the cost of production high and ends in high price level. Thus the cost

inflation has a spiraling effect on the price level.

Unsystematic Risk:

It is unique and peculiar to the firm or an industry. Unsystematic risk stems from

managerial inefficiency, technological change in the production process, availability of the raw

materials, changes in consumers preferences and labour problems. The unsystematic risk can be

classified into two types.

1. Business Risk 2. Financial Risk

1. Business Risk:



It is that portion of unsystematic risk caused by operating environment of the business.

Business risk arises from the inability of the firm to maintain its competitive edge and the

growth of the stability of the earning variation that occurs in the operating environment is

reflected in the operating income and expected dividends. It indicates business risk. Business

risk is any risk that can lower a business’s net assets or net income that could, in turn, lower the

return of any security based on it. Some business risks are sector risks that can affect every

company in a particular sector, while some business risks affect only a particular company.

2. Financial Risk:

It refers to the variability of the income to the equity capital due to debt capital.

Financial risk in a company is associated with the capital structure of the company. Capital

structure of the company consists of equity funds and borrowed funds. The presence of debt

and preference capital results in commitment of paying interest or prefixed rate of dividend.

This arises due to changes in the capital structure of the company. It is also known as

leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the

capital structure of a company indicates that the company is highly geared even if the per

capital earnings of such company may be more. Because of highly dependence on borrowings

exposes to the risk of winding up for its inability to honour its commitments towards lenders

and creditors. So the investors should be aware of this risk and portfolio manager should also

be very careful.

3. Regulation Risk:

Some investment can be relatively attractive to other investments because of certain

regulations or tax laws that give them an advantage of some kind. Municipal bonds, for

example pay interest that is exempt from local, state and federal taxation. As a result of that

special tax exemption, municipal can price bonds to yield a lower interest rate since the net

after-tax yield may still make them attractive to investors. The risk of a regulatory change that

could adversely affect the stature of an investment is a real danger. In 1987, tax laws changes

dramatically lessened the attractiveness of many existing limited partnership that relied upon



special tax considerations as part of their total return. Prices for many limited partnership

tumbled when investors were left with different securities, in effect, than what they originally

bargained for. To make matter worse, there was not an extensive secondary market for these

liquid securities and many investors found themselves unable to sell those securities at anything

but “fire sale” prices if at all.

4.Reinvestment Risk:

It is important to understand that YTM is a promised yield, because investors can earn

the indicated yield only if the bond is held to maturity and the coupons are reinvested at the

calculated YTM (yield to maturity). Obviously, no trading can be done for a particular bond if

the YTM is to earned. The investor simply buys and holds.

Reinvestment risk the YTM calculation assumes that the investor reinvests all

coupons received from a bond at a rate equal to computed YTM at the bond, thereby earning

interest over interest over the life of the bond at the computed YTM rate .in effect, this

calculation assumes that the reinvestment rate is the yield to maturity.

If the investor spends the coupons, or reinvest them at a rate different from the assumed

reinvestment rate of 10 percent, the realized yield that will actually be earned at the termination

of the investment in the bond will differ from the promised YTM. And, in fact, coupons almost

always will be reinvested at rates higher or lower than the computed YTM, resulting in a

realized yield that differs from the promised yield. This gives rise to reinvestment rate risk.

This interest-on-interest concept significantly affects the potential dollar return. The

exact impact is a function of coupon and time of maturity, with reinvestment becoming more

important as either coupon or time to maturity, or both, rises specifically.

1. Holding everything else constant, the longer maturity of a bond, the greater the

reinvestment risks.



2. Holding everything else constant, the higher the coupon rate, the greater the

dependence of the total dollar returns from the bond on the reinvestment of the coupon

payments.

In fact, for long-term bonds the interest-on-interest component of the total realized

yield may account for more than three-fourths of the bond’s total dollar return.

5.International Risk :

International risk can include both country risk and exchange rate risk.

1. Exchange Rate Risk:

All investors who invest internationally in today’s increasingly global investment arena

face the prospect of uncertainty in the returns after they convert the foreign gain back to their

own currency. Unlike the past when most U.S. investors ignored international investing

alternatives, investors today must recognize and understand exchange rate risk, which can be

defined as the variability in returns on securities caused by currency fluctuations. Exchange rate

risk is sometimes called currency risk.

Currency risk affects international mutual funds, global mutual funds, closed-end single

country funds, American depository receipts, foreign stocks and foreign bonds. For example, a

U.S. investor who buys a German stock denominated in marks must ultimately convert the

returns from this stock back to dollars. If the exchange rate has moved against the investor,

losses from these exchange rate movements can partially or totally negate the original return

earned.

2. Country Risk:

Country risk, also referred to as political risk, is an important risk for investors today.

With more investors investing internationally, both directly and indirectly, the political, and

therefore economic, stability and viability of a country’s economy needs to be considered. The

United States has the lowest country risk, and other countries can be judged on a relative basis



using the United States as a benchmark. Example of countries that needed careful monitoring in

the 1990s because of country risk included the former Soviet Union and Yugoslavia, China,

Hong Kong and South Africa.

3. Liquidity Risk :

Liquidity risk is the risk associated with particular secondary market in which a security

trades. An investment that can be bought or sold quickly and without significant price

concession is considered liquid. The more uncertainty about the time element and the price

concession, the greater the liquidity risks. A treasury bill has little or no liquidity risk, whereas

a small OTC stock may have substantial liquidity risk.

RISK AVOIDANCE:

Investment planning is almost impossible without a thorough understanding of risk.

There is a risk/return trade off. That is, the greater risk is accepted, and the greater must be the

potential return as reward for committing one’s fund to an uncertain outcome. Generally, as the

level of risk rises, the rate of return should also rise, and vice versa. One way to handle risk is

to avoid it. Risk avoidance occurs when one chooses to completely avoid the activity the risk is

associated with. In the investment world, avoidance of some risk is deemed to be possible

through the act of investing in “risk-free” investments. Stock market risk can be completely

avoided by one choosing to have no exposure to it by not investing in equity securities.

1. Risk transfer:

Another way to handle risk is to transfer the risk. Risk transfer in investing can be done

where one may choose to purchase a municipal bond that is insured. One may purchase a put

option on a stock, which allows the person to “put to” or sell to someone his or her stock at a



set price, regardless of how much lower the stock may drop. There are many examples of risk

transfer in the area of investing.

2. The Risk Averse Investor:

Do investors dislike risk? In economics in general, and investments in particular, the

standard assumption is that investors are rational. Rational investors prefer certainty to

uncertainty. A risk-averse investor is one who will not assume risk simply for its own sake and

will not incur any given level of risk unless there is an expectation of adequate compensation

for having done so. In fact, investors cannot reasonably expect to earn larger returns without

assuming larger risks. Investors deal with risk by choosing (implicitly or explicitly) the amount

of risk they are willing to incur. Some investors choose to incur high level of risk with

expectation of high levels of return. Other investors are unwilling to assume much risk, and

they should not expect to earn large returns.

MEANING OF RETURN :

Return is one of the primary objectives of investment, which acts as a driving force for

investment. Risk is inevitable and it is positively correlated with expected return. Return to an

investor is of two types, current yield and capital appreciation. Current yield is the return,

which is got in the form of individuals/interest whereas capital appreciation is the return, which

we get after liquidation of shares.

Return = Current yield (dividend/interest) + Capital

Appreciation/ Capital Gain

TYPES OF RETURN

1. HISTORICAL RETURN:

Return calculated are on past data which has already occurred is called as historical

return. Historical return is a post-mortem analysis of investment, which lacks insight for future.



Historical return is less risky and more accurate compared to expected return since it does not

involve prediction of interest or dividend or closing price. Historical return is also called as post

return or actual return.

Return = Cash payment + Closing price – Beginning price

Beginning Price

2. EXPECTED RETURN

Return calculated based or future estimates and calculation is called as expected return.

Expected Return = Expected Dividend + Capital Gain (expected)

Beginning price

RISK MEASUREMENT:

Understanding the nature of risk is not adequate unless the investor or analyst is capable

of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms

makes it comparable with other stocks. Measurement cannot be assured of cent percent

accuracy because risk is caused by numerous factors such as social, political, economic and

managerial efficiency. Measurement provides and approximates qualification of risk.

1. Volatility:

Of all the ways to describe risk, the simplest and possibly most accurate is “the

uncertainty of a future outcome”. The anticipated for some future period is known as expected

return. The actual return over some past period is known as the realized return. The simplest

fact that dominates investing is that the realized return on an asset with any risk attached to it



may be different from what was expected. Volatility may be described as the range of

movement (or price fluctuation) from the expected level of return. The more a stock. For

example, goes up and down in price, the more volatile that stock is. Because wide price swings

create more uncertainty of an eventual outcome, increased volatility can be equated with

increased risk. Being able to measure and determine the past volatility of a security is important

in that it provides some insight into the riskness of that security as an investment.

2. Standard Deviation :

Investors and analyst should be at least familiar with study of probability distributions.

Since the return, an investor will earn from investing is not known, it must be estimated.

Probability Distribution:

Probability represent the likelihood of various outcomes and are typically expressed as a

decimal (sometimes fractions are used). The sum of the probabilities of all possible outcomes

must be 1.0, because they must completely describe all the (perceived) likely occurrences.

Probability distribution can be either discrete or continuous. With a discrete

probability, a probability is assigned to each possible outcome. With a continuous probability

distribution an infinite number of possible outcomes exist. The most familiar continuous

distribution is the normal distribution depicted by the well-known bell shaped curve often

used in statistics. It is a two-parameter distribution in that the mean and the variance fully

describe it.

To describe the single most likely outcomes from a particular probability distribution, it

is necessary to calculate its expected value. The expected value is average of all possible return

outcomes, where each outcome is weighted by its respective probability of occurrence. For

investors, this can be described as the expected return. To calculate the total risk associated

with the expected return, the variance or standard deviation is used. Since variance, volatility

and risk can in this context be used synonymously, the larger the standard deviation, the more

uncertain the outcome.



Calculating a standard deviation using probability distributions involves making

subjective estimates of the probabilities and the likely returns. However, we cannot avoid such

estimates because future returns are uncertain. The prices of securities are based on investors’

expectations about the future. The relevant standard deviation in this situation is the ex-ante

standard deviation and not the ex-post based on realized returns.

Although standard deviations are based on realized returns are often used as proxies for

ex-ante standard deviations, investors should be careful to remember that the past cannot

always be extrapolated into the future without modifications. Ex-post standard deviations may

be convenient, but they are subject to errors. One important point about the estimation of

standard deviation is the distinction between individual securities and portfolios.

Standard deviation is a measure of the total risk of an asset or a portfolio, including

therefore both systematic and unsystematic risk. It captures the total variability in the assets or

portfolio’s return, whatever the sources of that variability. In summary, the standard deviation

of return measures the total risk of one security or the total risk of a portfolio of securities.

The historical standard deviation can be calculated for individual securities or portfolios

of securities using total returns for some specific period of time. This ex-post value is useful in

evaluating the total risk for a particular historical period and in estimating the total risk that is

expected to prevail over some future period.

3. Beta:

Beta is a measure of the systematic risk of a security that cannot be avoided through

diversification. Beta is a relative measure of risk-the-risk of an individual stock relative to the

market portfolio of all stocks. If the security’s returns move more (less) than the market’s

return as the latter changes, the security’s returns have more (less) volatility (fluctuations in

price) than those of the market. It is important to note that beta measures a security’s volatility,

or fluctuations in price, relative to a benchmark, the market portfolio of all stocks. Beta is

useful for comparing the relative systematic risk of different stocks and, in practice, is used by

investors to judge a stock’s riskiness. Stocks can be ranked by their betas. Because the variance



of the market is a constant across all securities for a particular period, ranking stocks by beta is

the same as ranking them by their absolute systematic risk. Stocks with high betas are said to be

high-risk securities.

OPERATIONAL DEFINITION OF CONCEPTS:

Portfolio: In finance, a portfolio is a collection of investments held by an institution or a

private individual. Holding a portfolio is part of an investment and risk-limiting strategy called

diversification. By owning several assets, certain types of risk (in particular specific risk) can

be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold

certificates, real estate, futures contracts, production facilities, or any other item that is

expected to retain its value.

Portfolio Management:

Portfolio management involves deciding what assets to include in the portfolio, given

the goals of the portfolio owner and changing economic conditions. Selection involves deciding

what assets to purchase, how many to purchase, when to purchase them, and what assets to

divest.

These decisions always involve some sort of performance measurement, most typically

expected return on the portfolio, and the risk associated with this return (i.e. the standard

deviation of the return). Typically the expected return from portfolios comprised of different

asset bundles is compared.

Risk:

The chance that an investment's actual return will be different than expected. This

includes the possibility of losing some or all of the original investment. Risk is usually

measured by calculating the standard deviation of the historical returns or average returns of a

specific


http://en.wikipedia.org/wiki/Standard_deviation

http://en.wikipedia.org/wiki/Standard_deviation

http://en.wikipedia.org/wiki/Risk

http://en.wikipedia.org/wiki/Expected_return

http://en.wikipedia.org/wiki/Futures_contract

http://en.wikipedia.org/wiki/Real_estate

http://en.wikipedia.org/wiki/Gold_certificates

http://en.wikipedia.org/wiki/Gold_certificates

http://en.wikipedia.org/wiki/Warrant_(finance)

http://en.wikipedia.org/wiki/Options

http://en.wikipedia.org/wiki/Bonds

http://en.wikipedia.org/wiki/Stocks


investment. A fundamental idea in finance is the relationship between risk and return. The

greater the amount of risk that an investor is willing to take on, the greater the potential return.

The reason for this is that investors need to be compensated for taking

on additional risk.

Return:

The gain or loss of a security in a particular period. The return consists of

the income and the capital gains relative on an investment. It is usually quoted as a percentage.

The general rule is that the more risk you take, the greater the potential for higher return - and

loss.

Risk-Free Rate of Return:

The theoretical rate of return of an investment with zero risk. The risk-free rate

represents the interest an investor would expect from an absolutely risk-free investment over a

specified period of time. The risk-free rate is the minimum return an investor expects for any

investment because he or she will not accept additional risk unless the potential rate of return is

greater than the risk-free rate.

Risk-Return Tradeoff:

The principle that potential return rises with an increase in risk. Low levels of uncertainty

(low risk) are associated with low potential returns, whereas high levels of uncertainty (high



risk) are associated with high potential returns. According to the risk-return tradeoff,

invested money can render higher profits only if it is subject to the possibility of being lost.

RESEARCH DESIGN:

This chapter basically deals with the methodology that has been employed in this

dissertation. It covers the type of research used in this dissertation, sample size chosen, sample

description, data collection. Each will be described separately under the following headings.

A) Type of research:

This study is descriptive in nature. The main purpose of descriptive research is to

describe the state of view as it exists at present. The descriptive research deals with

demographic characteristics.

B) Sample size:

For the dissertation 15 companies has been selected to conduct the study. The study

considers the financial year of 2010-11. Only ten months duration has been taken, its starts

from April 2010 to January 2011.

C) Data collection:

Basically, the data used in this study are secondary in nature. The monthly closing share

prices of companies. The dividend issued by the company. The data’s are collected in the from



of secondary in sources. The companies selected for research purpose consist of pharmacy,

heavy electrical, construction, finance, IT, petroleum, tobacco, and automobile sector.

The monthly closing share prices of the selected companies of BSE Sensex & the

dividends of the selected companies are obtained in business news papers like Economic Times

& Business Standard & also obtained through some of webs are BSE, Moneypore.com,

Rediffmoney.com, Moneycontrol.com and NSE India.com.

D) Techniques of Data Analysis:

In this study the data analysis is made through the statistical techniques of Modern

portfolio Theory Efficient Frontier (Markowitz frontier).

Efficient Frontier:

Every possible asset combination can be plotted in risk-return space, and the collection

of all such possible portfolios defines a region in this space. The line along the upper edge of

this region is known as the efficient frontier (sometimes "The Markowitz frontier").

Combinations along this line represent portfolios (explicitly excluding the risk-free alternative)

for which there is lowest risk for a given level of return. Conversely, for a given amount of risk,

the portfolio lying on the efficient frontier represents the combination offering the best possible

return. The efficient frontier is illustrated above, with return μp on the y-axis, and risk σp on the

x-axis. The efficient frontier will be convex – this is because the risk-return characteristics of a


http://en.wikipedia.org/wiki/Capital_asset_pricing_model#The_efficient_frontier


portfolio change in a non-linear fashion as its component weightings are changed. (As

described above, portfolio

The various statistical tools used in this study are shown below.

Rate of Return:

The return of a security is nothing but the weighted average of the historical returns of

the securities held in a portfolio. Historical return (Rate of Return) of any security can be

calculated as the holding period yield of that security. It is to be computed with the following

formula:

Dividend + (P1- P0)

Rate of Return =

P0

Where P1 represents Current price of share

P0 represents Opening price of share

Expected Rate of Return:

The average of rate of returns, in securities analysis, it is the expected value, or mean, of

all the likely returns of investments comprising a portfolio. It is also known as "expected

return".

It is calculated by the following formula:

R = ∑ Rn

Standard Deviation

Risk is the chance that an investment's actual return will be different than expected.

Technically, this is measured in statistics by standard deviation. Risk means you have the

possibility of losing some, or even all, of our original investment. Standard deviation is a

statistical measurement that measures the risk of the securities. It is to be computed with the

following formula.

σ=√∑ (R− �͞ R ¿)2

n−1¿


http://www.investopedia.com/terms/s/standarddeviation.asp

http://www.investopedia.com/terms/r/risk.asp


Beta

Beta is the slope of the characteristic regression line. Beta describes the relationship

between the stock and the index returns.

β=n∑ xy−(∑ x)(∑ y )

n∑ x2−(∑ x)2

1)BETA = +1.0

One percent change in market return index return causes exactly one percent change in the

stock return. It indicates that the stock moves in tandem with the market.

2)BETA = +0.5

One percent change in market index return causes 0.5 per cent change in the stock return.

The stock is less volatile compared to the market.

3)BETA = +2.0

One percent change in market index return causes 2 percent change in the stock return. The

stock return is more volatile. When there is a decline of 10 percent in the market return, the

stock with a beta of 2 would give a negative return of 20 percent. The stock with more than 1

beta value is considered to be risky.

4)Negative beta value indicates that the stock return moves in the opposite direction to the market

return. A stock with a negative beta of -1 would provide a return of 10 percent, if the market

return declines by 10percent and vice versa.

5)Stocks with negative beta resist the decline in the market return, but stocks with negative returns

are very rare.

Alpha

The intercept of the characteristic regression line is alpha i.e. the distance between the

intersection and the horizontal axis. It indicates that the stock return is independent of the

market returns. A positive value of alpha is a healthy sign. Positive alpha value would yield

profitable return. According to the portfolio theory, in a well diversified portfolio the average

value of the alpha of all stock turns to be zero.



= y−β x

OBJECTIVES OF THE STUDY:

1. To find expected rate of return & standard deviation of the companies.

2. To know the price fluctuations of the shares in the stock market for a particular period.

3. To know the importance of the risk analysis in trading.

4. To measure price volume relationship for individual stocks.

5. To know the shares yielding highest return from the companies selected for the study.

6. To know risk level of various companies selected for the study.

7. To give an insight to the investor who are looking for low risk and better return trade off from

the above analysis.

SCOPE OF THE STUDY:

To find expected rate of return & standard deviation of the shortlisted companies .To

know the price fluctuations of the shares in the stock market for a particular period .To know

the importance of the risk analysis in trading .To measure price volume relationship for

individual stocks .To know the shares yielding highest return from the companies selected for

the study .To know risk level of various companies selected for the study .To give an insight to

the investor who are looking for low risk and better return trade off from the above analysis.

This will helpful to the investors while investing in the securities.

LIMITATIONS OF THE STUDY:

1. This project covers only selected companies of BSE Sensex

2. The closing share prices of selected companies were taken only for the time period from March

2009 to January 2010.

3. Only ‘A’ group scrip of BSE Sensex in taken in this study.



4. The study limited only to 15 stocks. The BSE Sensex consist of 30 scripts. So it does not truly

reflect as a whole.

OVERVIEW OF THE CHAPTER SCHEME:

The investors take a number of decisions in the process of investment. The investor has

to decide about his risk tolerance level and the nature of assets to be bought. Once he decides

he has to select it from the different alternatives. It should be selected on the basis of their risk

and return. The investors analyses the risk and returns of holding a particular stock for a

particular term. The study helps the investor to decide among different alternatives depending

on his/her risk tolerance.

Risk is the potential impact (positive or negative) to an asset or some characteristics of

value that may arise from some present process or from some future event. In everyday usage,

“risk” is often used synonymously with “probability” and restricted to negative risk or threat. In

professional risk assessment, risk combines the probability of an event occurring with the

impact that event would be.

Risk is a characteristics feature of all commodity and capital markets. Prices of all

commodities be they agricultural like wheat, cotton rice, coffee or tea or non-agricultural Like

silver, gold etc – are subject to fluctuation over time in keeping with prevailing demand and

supply conditions. Procedures or processors of these commodities obviously cannot be sure of

the prices that their production or processors are not sure what they would have to pay for their

buy. Similarly prices of shares and debentures or bonds and other securities are also subject to

continuous change. Those who are charged with the responsibility of managing money, their

own or of others are therefore constantly exposed to the threat of risk.

Risk is an essential yet precarious element of investing, one should, regardless of what

kind of investor you are; gain a fairly good awareness of how investors and companies work to

protect themselves. Whether or not you decide to start practicing these intricate uses of

derivatives, learning about how hedging works will help advance your understanding the

market, which will always help you be a better investor.



As risk management and their functions have become more prominent, it plays a vital

role for the investors to know the risk levels involved in their investment. It helps them to

analyze the levels of risk and opt for those securities, which yields high returns with minimal

risk.

The researcher has used various books, magazines, articles and Internet to analyze the

report. The study undertaken includes secondary data. The researcher has adopted casual

research for the study. A casual research is undertaken when the researcher is interested in

knowing the cause and effect relationship between two or more variables. Such studies are

based on reasoning along with tested lines.

The tables for main points are prepared and analyzed, graphs has been drawn where

ever necessary. Therefore, secondary data have been tabulated, graphically depicted and

analyzed. Based on this analysis the conclusions are drawn and recommendations are made.

The following methods are used for this analysis:

1. Rate of Return

2. Expected Return.

3. Standard deviation

4. Alpha.

5. Beta.

For the purpose of analyzing the long term trading return of the particular stock,

expected return, standard deviation, alpha, beta are calculated in order to know the variations of

the shares in the share market and companies that are considered for this analysis are



OVERVIEW OF THE COMPANY:

At Acumen, they believe that life is all about dreaming a big dream, planning how to

make that dream come true and then working towards achieving it. That’s why they made it

our driving force. And that is what they help our clients and associates to do.

The Dream

Cut to 1996: The Indian markets were still very small, largely unorganized, and more or

less a closed &opaque market. A group of professional stockbrokers dreamed of changing that.

The dream was to spread the equity market cult across the country and making investing a


SL. No COMPANY

1 Axis Bank

2 Asian Paints

3 BHEL

4 Cipla

5 DLF

6 Hero Honda

7 Infosys

8 ITC

9 Indian Oil

10 ONGC

11 Mahindra & Mahindra

12 Reliance Capital

13 Tata Consultancy Services

14 Tata Steel

15 Wipro


pleasant experience. The Idea was to take the markets to the investors instead of the investors

having to come to the markets and to give them fair, transparent efficient & time bound

services. It was with this dream that the Acumen group was born.

The Plan

A lot of planning was required to achieve the lofty dreams that the promoters had. The

5 most important areas were identified :

Great Human resource

Entire range of financial products

Great Technology

Great Research and awareness programmes

Great Infrastructure & Reach

Once the fundamentals were identified, they set about the putting the plan into action. A

good team was put in place, and HR policies were chalked out to fairly reward and retain our

human talents.

Memberships of all the leading exchanges, both in the capital markets (BSE & NSE for

both Cash and futures segment), commodities markets (MCX, NCDEX and NMCE) and

currency markets (NSE & MCX SX) were taken, as was that of NSDL for depository

operations, and portfolio management license for managing client portfolios. They also took

membership of DGCX, an international commodity and currency exchange based in Dubai.

They are also members of the MCX SX.

They now offer all financial products to our clients :

Equity trading

Commodity trading



Currency Futures

Interest Rate Futures

Depository Services

Mutual funds

Insurance

IPO

Realizing at a very early stage that technology would drive future growth and play the

key role in developing the Indian markets, they invested heavily in it, being one of the first to

use the CTCL ODIN software for front end trading, HCL’s private V Sat network for

connectivity, Apex Software’s Lidha Didha for back office servicing, and Asian CERC’s online

trading software for internet trading. It was a move that paid off, as is proven from the fact that

these software and technologies are today among the most sought after in the Indian Capital

markets. Talk about early movers.

They conducted training programmers’ across the country to make investors aware of

the changes happening in the financial markets and the opportunities that were opening up,

developed in-house research that were sent to our associates on a regular basis. Technical calls

for intraday trading and investments calls are regularly given to all our clients over mail, chat,

SMS and trading platforms.

Our service is customer oriented and so they believe the dictum: Customer is the king.

This ensures that our service and support adorns a cutting edge experience while dealing with

us.

Our dream is converted into action by the following group companies :

Acumen Capital Market (India) Ltd

Acumen Commodities (India) Ltd

Peninsular Middle East DMCC



PCML Properties Pvt. Ltd.

The Achievement

Thanks to the planning that went in into converting our dream into reality, they are well

on our way to achieve our dream. Over time, Acumen has emerged as a leading financial

services provider, having a network of 40,000 customers, spread over 12 states across the

country, served by over 375 associates, a figure that continues to grow aggressively in the near

future, thanks to our young, ambitious and service oriented team that combines well with the

team of experienced professionals at senior levels who have spent a life time in the financial

services sector.

At Acumen, they promise to keep to rediscovering ourselves & redefining our services

to ensure that they deliver what they dreamt and promised to deliver.

OVERVIEW OF THE INDUSTRY

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now

spanning three centuries in its 133 years of existence. What is now popularly known as BSE

was established as "The Native Share & Stock Brokers' Association"in1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956)

from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's

pivotal and pre-eminent role in the development of the Indian capital market is widely

recognized. It migrated from the open outcry system to an online screen-based order driven

trading system in 1995. Earlier an Association Of Persons (AOP), BSE is now a corporatized

and demutualised entity incorporated under the provisions of the Companies Act, 1956,

pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the

Securities and Exchange Board of India (SEBI). With demutualization, BSE has two of world's

best exchanges, Deutsche Bores and Singapore Exchange, as its strategic partners.



Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector

by providing it with an efficient access to resources. There is perhaps no major corporate in

India which has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed

companies and the world's 5th in transaction numbers. The market capitalization as on

December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700

listed companies, which for easy reference, are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic

stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The

SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and

market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.

BSE has entered into an index cooperation agreement with Deutsche Brose. This agreement has

made SENSEX and other BSE indices available to investors in Europe and America. Moreover,

Barclays Global Investors (BGI), the global leader in ETFs through its iShares® brand, has

created the 'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF

enables investors in Hong Kong to take an exposure to the Indian equity market.

BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominated

futures trading of SENSEX in the U.S. The tie-up enables eligible U.S. investors to directly

participate in India's equity markets for the first time, without requiring American Depository

Receipt (ADR) authorization. The first Exchange Traded Fund (ETF) on SENSEX, called

"SPICE" is listed on BSE. It brings to the investors a trading tool that can be easily used for the

purposes of investment, trading, hedging and arbitrage. SPICE allows small investors to take a

long-term view of the market.

BSE provides an efficient and transparent market for trading in equity, debt instruments

and derivatives. It has a nation-wide reach with a presence in more than 450 cities and towns of

India. BSE has always been at par with the international standards. The systems and processes

are designed to safeguard market integrity and enhance transparency in operations. BSE is the

first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It

is also the first exchange in the country and second in the world to receive Information Security CMR CENTER FOR BUSINESS STUDIES

27


Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading

System (BOLT).

BSE continues to innovate. In recent times, it has become the first national level stock

exchange to launch its website in Gujarati and Hindi to reach out to a larger number of

investors. It has successfully launched a reporting platform for corporate bonds in India

christened the ICDM or Indian Corporate Debt Market and a unique ticker screen aptly named

'BSE Broadcast' which enables information dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic

Reporting System) to facilitate information flow and increase transparency in the Indian capital

market. While the Directors Database provides a single-point access to information on the

boards of directors of listed companies, the ICERS facilitates the corporate in sharing with BSE

their corporate announcements.

BSE also has a wide range of services to empower investors and facilitate smooth

transactions

Investor Services: The Department of Investor Services redresses grievances of investors.

BSE was the first exchange in the country to provide an amount of Rs.1 million towards the

investor protection fund; it is an amount higher than that of any exchange in the country. BSE

launched a nationwide investor awareness program me- 'Safe Investing in the Stock Market'

under which 264 programmes were held in more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line

screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations

located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized

exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors

anywhere in the world to trade on the BSE platform.



Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis

the price movements, volume positions and members' positions and real-time measurement of

default risk, market reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in

collaboration with reputed management institutes and universities. It offers over 40 courses on

various aspects of the capital market and financial sector. More than 20,000 people have

attended the BTI programmes.

AWARDS:

The World Council of Corporate Governance has awarded the Golden Peacock Global CSR

Award for BSE's initiatives in Corporate Social Responsibility (CSR).

The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31

2007 have been awarded the ICAI awards for excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its

efforts in employer branding through talent management at work, health management at work

and excellence in HR through technology.

Drawing from its rich past and its equally robust performance in the recent times, BSE will

continue to remain an icon in the Indian capital market.

ANALYSIS & INTERPRETATION OF DATA

The rate of return, expected rate of return (Mean) & Risk (Standard Deviation, Alpha &

beta) are determined by using the formulas for the following company.

1-Market return



Table 1.Market Rate of Return, Expected Rate of Return & Risk

[Source: Primary Data NSDL]

April May June July Aug Sep Oct Nov Dec Jan

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

S&P CNX NIFTY

Exhibit 1- Return of market

Inference:


Month Market Month Market

April 0.0055 September 0.1161

May -0.0364 October -0.0020

June 0.0444 November -0.0258

July 0.0104 December 0.0464

August 0.0065 January -0.1025

Expected Rate of ReturnRisk (Standard

Deviation)

0.00626 0.0828


The expected rate of return of S&P CNX NIFTY for the past ten months from April

2010 to January 2011 is showing the positive trend of 0.00626 with the standard deviation of

0.0828.

2- Axis bank

Month Axis Bank Month Axis Bank


May -0.0205 October -0.0345


July 0.0910 December -0.0154

August -0.0007 January -0.0593

Table 2: Axis Bank Rate of Return, Expected Rate of Return & Risk




Beta Alpha Expected Rate of

Return

Risk (Standard

Deviation)

0.9368 0.1182 0.01768 0.1783

APR MAY JUNE JULY AUG SEP OCT NOV DEC JAN

-0.1

-0.05

0

0.05

0.1

0.15

0.2

AXIS BANK

Exhibit 2- Axisbank rate of return

Inference:

The expected rate of return of Axis Bank for the past ten months from April 2010 to

January 2011 is showing the positive trend of 0.01768 with the standard deviation of 0.1783. It

is interpreted that the share price of Axis Bank is not improving trend. The company yields a

dividend of Rs.12 per share. Since the beta is positive and is almost one (0.9368) the stock

tends to move with the market. The excess return to risk (i.e. alpha) is positive which is very

good for stock.



3- Asian paints

Table 3: Asian paints Rate of Return, Expected Rate of Return & Risk

Month Asian paints Month Asian paints

April 0.0238 September -0.0328

May 0.0079 October 0.0122






Return

Risk (Standard

Deviation)

0.5220 0.2618 0.02947 0.2884




-0.15

-0.1

-0.05

0

0.05

0.1

0.15

ASIAN PAINTS

Exhibit 3 Asian paints rate of return

Inference:

The expected rate of return of Asian Paints for the past ten months from April 2010 to January

2011 is showing the positive trend of 0.2947 with the standard deviation of 0.2884. It is

interpret that the lesser the risk lesser the return. The dividend yield by the company is Rs.8.5

per share. Since the beta is less than one (i.e. 0.5220) . The excess return to risk (i.e. alpha) is

positive which is a good sign of the stock for the investor to invest.



4- BHEL

Table 4: BHEL Rate of Return, Expected Rate of Return & Risk



Return

Risk (Standard

Deviation)

0.5935 -0.0479 -0.0010 0.0520

APR MAY JUNE JULY AUG SEP Oct NOV DEC JAN

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

BHEL

Exhibit 4: BHEL rate of return


Month BHEL Rate of return Month BHEL Rate of return


May -0.0508 October -0.0039


July -0.0035 December 0.0600



Inference:

The expected rate of return of BHEL for the past ten months from April 2010 to January

2011 is showing the negative trend of -0.00107 with the standard deviation of 05935. It is

interpret that the share price of BHEL is in improving trend. The company yields a dividend of

Rs.12.3 per share. Since the beta is less than one (i.e. 0.05935). The excess return to risk (i.e.

alpha) is negitive and the investors are not advisable to invest in this stock.

5- CIPLA

Table 5: Cipla Rate of Return, Expected Rate of Return & Risk



Month Cipla Rate of Return Month Cipla Rate of Return


May -0.0671 October 0.0994





Return

Risk (Standard

Deviation)

0.8405 -0.0040 0.0048 0.2507



-0.1

-0.05

0

0.05

0.1

0.15

CIPLA

Exhibit 5: CIPLA rate of return

Inference:

The expected rate of return of Cipla for the past ten months from April 2010 to January


interpret that the lesser the standard deviation lesser the expected return. The dividend yield by

the company is Rs.1 per share. Since the beta is positive (i.e.0.8405) the stock will move in

normal direction to the market. The excess return to risk (i.e. alpha) is negitive and not

advisable for the investors to invest in this stock.



6- DLF

Table 6: DLF Rate of Return, Expected Rate of Return & Risk


Beta: Alpha: Expected Rate of

Return

Risk (Standard

Deviation)

2.0861 -0.3072 -0.01766 0.2118


-0.3

-0.2

-0.1

0

0.1

0.2

0.3

DLF


Month DLF Rate of Return Month DLF Rate of Return


May -0.1029 October -0.0661


July 0.0484 December -0.0392



Exhibit 6: DLF rate of return

Inference:

The expected rate of return of DLF for the past ten months from April 2010 to January

2011 is showing the negative trend of -0.01766 with the standard deviation of 0.2118. Though

the company yield a dividend of Rs.2 per share. Since this is a high beta stock (i.e. 2.0861). The

excess return to risk (i.e. alpha) is negative and it is not advisable for investment

7- HEROHONDA

Table 7: Hero Honda Rate of Return, Expected Rate of Return & Risk

Month Hero Honda Rate of Return MonthHero Honda Rate of

Return

April 0

September0.0536


June 0.0733 November 0.0794







Return

Risk (Standard

Deviation)

0.7658 -0.0359 0.00118 0.0774


-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

HERO HONDA

Exhibit 7: HEROHONDA rate of return

Inference:

The expected rate of return of Hero Honda for the past ten months from April 2010 to


is interpret that the lesser the risk lesser the return. The dividend yield by the company is Rs.30



per share. Since the beta is less than one (i.e. 0.7658). The excess return to risk (i.e. alpha) is

negative and it is not advisable to invest in this stock.

8- INFOSYS

Table 8: Infosys Rate of Return, Expected Rate of Return & Risk

Month Infosys Rate of Return Month Infosys Rate of Return


May -0.0146 October -0.0128







Return

Risk (Standard

Deviation)

1.0664 0.2717 0.03385 0.3288



-0.1

-0.05

0

0.05

0.1

0.15

0.2

INFOSYS

Exhibit 8: INFOSYS rate of return

Inference:

The expected rate of return of Infosys Technologies for the past ten months from April

2010 to January 2011 is showing the positive trend of 0.03385 with the standard deviation of

0.3288. It is interpreted that the higher the risk higher the return, the share price of the Infosys

Technologies is in positive trend. The dividend yield by the company is Rs.40 per share. Since

the beta is more then one (i.e. 1.0664). The excess return to risk (i.e. alpha) is positive and it is

advisable to invest in this stock.



9 - ITC

Table 9: ITC Rate of Return, Expected Rate of Return & Risk

Month ITC Rate of Return Month ITC Rate of Return








Return

Risk (Standard

Deviation)

0.6340 0.1289 0.01685 0.2315




-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

ITC

Exhibit 9: ITC rate of return

Inference:

The expected rate of return of ITC for the past ten months from April 2010 to January


interpreted that the lesser the risk lesser the return, the share price of the ITC is in positive

trend. The dividend yield by the company is Rs.10 per share. The excess return to risk (i.e.

alpha) is positive and advisable for investment for investors.



10 - INDIANOIL

Table 10: Indian oil Rate of Return, Expected Rate of Return & Risk

Month Indian oil Rate of Return Month Indian oil Rate of Return





August 0.1713 January 0.0234



Return

Risk (Standard

Deviation)

0.1246 0.5333 0.05561 0.5399



Apr May June July Aug Sep Oct Nov Dec Jan

-0.2-0.15

-0.1-0.05

00.05

0.10.15

0.20.25

0.3

INDIAN OIL

Exhibit 10: INDIAN OIL rate of return

Inference:

The expected rate of return of Indian Oil for the past ten months from April 2010 to


is interpreted that the lesser the risk lesser the return, the share price of the Indian oil is in

positive trend. The dividend yield by the company is Rs.13 per share. Since the beta is more

then one (i.e. 0.1246) . The excess return to risk (i.e. alpha) is positive which is a good sign of

the stock for investment.



11- ONGC

Table 6.11 ONGC Rate of Return, Expected Rate of Return & Risk

Month ONGC Rate of Return Month ONGC Rate of Return

April -0.0237 September 0.0620

May 0.1232 October -0.0591






Return

Risk (Standard

Deviation)

0.6106 0.1980 0.02361 0.2188




-0.1

-0.05

0

0.05

0.1

0.15

0.2

ONGC

Exhibit 11: ONGC rate of return

Inference:

The expected rate of return of ONGC for the past ten months from April 2010 to

January 2011 is showing the positive trend of 0.02361 with the lesser standard deviation of

0.2188. It is interpret that the share price of ONGC is in declining trend. Due to the fact that the

current price of ONGC is less than the base price, though the company yield a dividend of

Rs.17 per share. Since the beta is more than one (i.e. 0.6106). The excess return to risk (i.e.

alpha) is positive & it is advisable for the investors to invest.



12- MAHINDRA & MAHINDRA

Table 12- Mahindra & Mahindra Rate of Return, Expected Rate of Return & Risk

MonthMahindra & Mahindra Rate

of ReturnMonth

Mahindra & Mahindra

Rate of Return

April -0.0139September

0.1140







Return

Risk (Standard

Deviation)

0.6455 0.3752 0.04156 0.3997




-0.1

-0.05

0

0.05

0.1

0.15

M & M

Exhibit 12: MAHINDRA & MAHINDRA rate of return

Inference:

The expected rate of return of Mahindra & Mahindra for the past ten months from April

2010 to January 2011 is showing the positive trend of 0.04156 with the lesser standard

deviation of 0.3997. It is interpret that the share price of Mahindra & Mahindra is in declining

trend. Due to the fact that the current price of Mahindra & Mahindra is less than the base price,

though the company yield a dividend of Rs.7.5 per share. Since the beta is more than one (i.e.

0.6455). The excess return to risk (i.e. alpha) is positive and it is advisable for the investors to

invest.



13- RELIANCE CAPITAL

Table 13: Reliance capital Rate of Return, Expected Rate of Return & Risk

MonthReliance capital Rate of

ReturnMonth

Reliance capital Rate of

Return


May -0.1062 October 0.0519






Return

Risk (Standard

Deviation)

1.5180 -0.3010 -0.02060 0.2285




-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

RELIANCE CAPITAL

Exhibit 13: RELIANCE CAPITAL rate of return

Inference:

The expected rate of return of Reliance Capital for the past ten months from April 2010

to January 2011 is showing the negitive trend of -0.02060 with the lesser standard deviation of

0.2285. It is interpret that the share price of Reliance Capital is in declining trend. Due to the

fact that the current price of Reliance Capital is less than the base price, though the company

yield a dividend of Rs.6.50 per share. Since the beta is more then one (i.e. 2.62) . The excess

return to risk (i.e. alpha) is negative which is not a good sign of the stock for investment.



14- TATA CONSULTANCY

Table 14: Tata consultancy services Rate of Return, Expected Rate of Return & Risk

MonthTata consultancy services

Rate of ReturnMonth

Tata consultancy

services Rate of Return


May -0.0261 October 0.1387




[Source: Primary data NSDL]


Return

Risk (Standard

Deviation)

0.5011 0.4127 0.04435 0.4251




-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

TCS

Exhibit 14: TATA CONSULTANCY SERVICES rate of return

Inference:

The expected rate of return of TCS for the past ten months from April 2010 to January

2011 is showing the positive trend of 0.04435 with the lesser standard deviation of 0.4251. It is

interpret that the share price of TCS is in declining trend. Due to the fact that the current price

of TCS is less than the base price, though the company yield a dividend of Rs.2 per share.

Since the beta is (i.e. 0.5011) . The excess return to risk (i.e. alpha) is positive & advisable to

invest by the investors.



15- TATA STEEL

Table 15: Tata steel Rate of Return, Expected Rate of Return & Risk

Month Tata steel Rate of Return MonthBank of Baroda Rate of

Return


May -0.1793 October -0.0828

June -0.0140 November 0.0051





Return

Risk (Standard

Deviation)

1.6432 0.1217 0.02245 0.2494




-0.3

-0.2

-0.1

0

0.1

0.2

0.3

TATA STEEL

Exhibit 15: TATA STEEL rate of return

Inference:

The expected rate of return of Tata Steel for the past ten months from April 2010 to

January 2011 is showing the positive trend of 0.02245 with the lesser standard deviation of

0.2494. It is interpret that the share price of Tata Steel is in declining trend. Due to the fact that

the current price of Tata Steel is less than the base price, though the company yield a dividend

of Rs.8 per share. Since the beta is more then one (i.e. 1.6432) . The excess return to risk (i.e.

alpha) is positive which is a good sign of the stock for investment.



16- WIPRO

Table 16: Wipro Rate of Return, Expected Rate of Return & Risk

Month Wipro Rate of Return Month Wipro Rate of Return


May 0 October -0.0622

June -0.4230 November 0.0024





Return

Risk (Standard

Deviation)

0.5796 -0.3093 -0.0273 0.3067




-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

WIPRO

Exhibit 16: WIPRO rate of return

Inference:

The expected rate of return of Wipro for the past ten months from April 2010 to January

2011 is showing the negitive trend of -0..2730 the lesser standard deviation of 0.3067. It is

interpret that the share price of Wipro is in declining trend. Due to the fact that the current price

of Wipro is less than the base price, though the company yield a dividend of Rs.2 per share.

Since the beta is more then one (i.e. 0.5796) . The excess return to risk (i.e. alpha) is negative

which is not a good sign of the stock for investment.



Table 17:

Expected Return & Risk (Standard Deviation) of Selected Companies

SL.

NoCOMPANY

EXPECTED

RETURN

RISK

(STANDARD

DEVIATION)

1 Axis Bank 0.01768 0.1783

2 Asian Paints 0.02947 0.2884

3 BHEL -0.00107 0.0520

4 Cipla 0.00487 0.2507

5 DLF -0.01766 0.2118

6 Hero Honda 0.00118 0.0774

7 Infosys 0.03385 0.3288

8 ITC 0.01685 0.2315

9 Indian Oil 0.05561 0.5399

10 ONGC 0.02361 0.2188

11 Mahindra & Mahindra 0.04156 0.3997

12 Reliance Capital -0.02060 0.2285

13 Tata Consultancy

Services0.04435 0.4251

14 Tata Steel 0.02245 0.2494

15 Wipro -0.0273 0.3067



Axis Ban

k

Asian Pain

tsBHEL

Cipla DLF

Hero Honda

Infosys ITC

Indian Oil

ONGC

Mahindra

& Mah

indra

Relian

ce Cap

ital

Tata C

onsulta

ncy Ser

vices

Tata S

teel

Wipro

-0.04

-0.02

0

0.02

0.04

0.06

0.08

EXPECTED RETURN

Exhibit 17: Expected Return of selected companies.

The graph is exibiting the expected return of all the companies that has selected for the

purpose of calculation.



Axis Ban

k

Asian Pain

tsBHEL

Cipla DLF

Hero Honda

Infosys ITC

Indian Oil

ONGC

Mahindra

& Mah

indra

Relian

ce Cap

ital

Tata C

onsulta

ncy Ser

vices

Tata S

teel

Wipro0

0.1

0.2

0.3

0.4

0.5

0.6

RISK (STANDARD DEVIATION)

Exhibit 18: Risk (standard deviation) of selected companies

The graph is showing exibiting the risk standard deviation of all the companies that has

selected for the purpose of calculation.



Axis Ban

k

Asian Pain

tsBHEL

Cipla DLF

Hero Honda

Infosys ITC

Indian Oil

ONGC

Mahindra

& Mah

indra

Relian

ce Cap

ital

Tata C

onsulta

ncy Ser

vices

Tata S

teel

Wipro

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

RISK (STANDARD DEVIATION)EXPECTED RETURN

Exhibit 19: Expected return and risk of selected companies

The table is showing expected return and risk (standard deviation) of the selected 15

companies. All the companies is showing positive expected return but 4 companies which is

showing negative expected return. INDIAN OIL is the company which is having high expected

return (55.61%) and risk (standard deviation) 53.99% and it is interpreted in the graph.



FINDINGS :

There is a huge variation of return and standard deviation given by different companies.

There is an inconsistency in rate of return of the selected companies.

The return and risk doesn’t follow linear relationship.

Ref table/Chart

From the study it is clear that the Indian Oil Company earn the highest expected return of

55.61%. & it has the highest risk of 53.99%

There is much volatility in the rate of return of the selected companies.

Analysis of risk & return of the 15 securities of BSE Sensex shows that majority of securities

shows positive trend in the expected return (4 company is in negative trend).

From the study it is clear that ‘A’ group scrip BSE Sensex the low return at low risk.

From the study it is clear that the ONGC earn the highest expected return of 23.61%. & it has the

Lowest risk of 21.88%



SUGGESTIONS:

(a) Suggestions For The Investors:

The company should go for projected risk to reduce future risk.

Even, companies with negative returns will diversify risk by short selling.

The company should earn the consistent rate of return; it results in high expected return.

Investments in equities should be given longer time horizon to perform.

If the investor wants the high return of securities then the investor is ready to take the higher risk.

(b) Suggestions for the brokers:

Brokers should analyze the risk and return of the companies and suggest the investors in

which company they can invest and the reasons why they are suggesting these companies. If

possible show the investors about the findings and calculation for the investors.

CONCLUSION:CMR CENTER FOR BUSINESS STUDIES

64


Given longer time horizon, equities perform better compared to other investments.

Relatively stocks are very volatile.

Diversification reduces risk, more the diversification, less is the risk associated.

Past returns does not promise future returns.

Risk persists even after diversification.

Analyses of individual securities bring out the performance of risk & return of the

securities.

BIBLIOGRAPHYCMR CENTER FOR BUSINESS STUDIES

65


Books:

1. Prasanna Chandra, second edition (2005), “Investment Analysis & Portfolio Management”, Tata

McGraw Hill Publication.

2. Portfolio Management Theory & Practice, ICFAI.

3. Security analysis and portfolio management- punithavathy pandian

Websites

www.moneycontrol.com

investopedia.com

www.rediffmoneywiz.com

www.economictimes.com

www.bseindia.com

www.googlefinance.com


http://www.googlefinance.com/

http://www.economictimes.com/

http://www.rediffmoneywiz.com/

http://www.moneycontrol.com/


ANNEXURE

Dividends of the Companies

SL. No COMPANY DIVIDEND PER SHARE (Rs)

1 Axis Bank 12

2 Asian Paints 8.5

3 BHEL 12.3

4 Cipla 1

5 DLF 2

6 Hero Honda 30

7 Infosys 40

8 ITC 10

9 Indian Oil 13

10 ONGC 17

11 Mahindra & Mahindra 7.5

12 Reliance Capital 6.5

13 Tata Consultancy Services 2

14 Tata Steel 8

15 Wipro 2



Com

pany

Months

Axis BankAsian

PaintsBHEL Cipla DLF

March 1168 2038 2390 338 309

April 1270 2078 2492 343 311

May 1232 2086 2353 319 277

June 1242 2301 2459 339 289

July 1343 2603 2438 326 301

August 1330 2762 2407 303 302

September 1536 2663 2478 322 378

October 1471 2687 2456 353 351

November 1366 2649 2204 343 306

December 1333 2878 2324 370 292

January 1242 2577 2219 332 224

The closing share price of the companies from March 2010 to January 2011

Com

pany

Months

Hero

Honda Infosys Indian oil ITC

Mahindra

&

Mahindra



March 1945 2616 294 263 541

April 1915 2738 295 266 526

May 1937 2658 353 283 573

June 2049 2791 403 305 627

July 1814 2788 362 309 661

August 1792 2713 411 163 627

September 1858 3050 417 178 691

October 1865 2971 418 171 734

November 1983 3051 347 172 765

December 1988 3443 342 175 778

January1633 3118 337 163 713



Com

pany

Months

ONGCReliance

capital Tata steel TCS Wipro

March 1098 756 632 780 706



April 1055 739 619 765 671

May 1168 654 500 743 669

June 1321 763 485 751 384

July 1240 783 537 840 412

August 1338 758 523 844 400

September 1404 780 652 927 450

October 1304 814 590 1053 420

November 1245 650 585 1076 419

December 1288 668 680 1165 491

January 1178 523 640 1160 438




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risk & return of selected company securities traded in BSE Sensex

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