Risk Return Paper

7/31/2019 Risk Return Paper

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RISK AND RETURN ANALYSIS OF SELECTED INDIAN COMPANIES

AT THE TIME OF MARKET VOLATALITY

Amandeep Kaur Shahi* Kriti Avasthi**

*Faculty, Research Scholar, Rayat Institute of Management, Railmajra, Distt. S.B.S. Nagar

Ph. 95010-17717, e-mail: [email protected]** Faculty, Research Scholar, Rayat Institute of Management, Railmajra, Distt. S.B.S. Nagar

Ph. 9872777563, e-mail:[email protected]

ABSTRACT

The Indian capital market has been witnessing an unprecedented growth with the back of soaring

sensex. Stock market has become the most desirable investment option for both Indian and foreign

investors. Return and risk are inseparable so it is important to study the risk and return element

and their relationship. The beta values calculated will measure the sensitivity of the return of the

security as compared with the market return. These beta values are of extreme use for the

investors seeking to invest in stocks of different companies. The study will be helpful for the

investors and experts and they can analyze the market and the impact of market volatilities on risk

and return. The study will also helps in finding the kind of securities based on beta values so that

investors can invest accordingly. As there is a growing concern about the investment amongst the

investors, this study will help in understanding the risk and return element of investment. The study

will also help in studying the relationship between risk and return. The calculation of the beta

values will also help in finding the kind of securities i.e. aggressive, defensive and average

security. The study concluded that there is a insignificant difference between the security returns

and market index return and the risk of stocks was higher than the risk in market as indicated by

high standard deviation of all stocks as compared to standard deviation of Market index.

Financial sector securities are aggressive and average and Most of the Non-financial securities

are Defensive. It was found that HDFC, Reliance and Sail are Aggressive securities where as

ACC, BPCL, ITC, Ranbaxy, ONGC, PNB and Wipro are Defensive securities.

Key Words-Aggressive, Defensive,Risk, Return, Volatilit.y

INTRODUCTION
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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The Indian Capital Market has witnessed tremendous growth in past due to magnificent

performance of Indian companies and growth rate of GDP. In past one year there has been sharp

fall in stock prices and market is facing volatility at the times of Recession. Risk and Return

always remain important at the times of making Investment decisions. Return and Risk are

inseparable in most of the investments and it is important to determine how much risk is

appropriate to attain the required rate of return from investing in any stock under consideration.

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). The

risk that cannot be diversified away like interest rate risk and recession is known as systematic

risk. Unsystematic risk is stock specific and can be diversified away. Scarcities in raw material

supply, labour strike, and management inefficiency are all problems specific to a company and are

internal in nature. These negative factors can make the share price fall sharply but can be avoided

if well thought. An investment in the shares of certain other companies with sound management

can help minimize this risk. Therefore diversification is the mantra for any prudent investor.

Diversification is done in many ways. Investors can diversify across one type of asset classification

- such as equities or among different asset classes such as stocks, bonds, fixed income and bullion

etc.

Based on the fact that a part of a securitys risk can be eliminated through diversification and the

rest cannot, the model decomposes total risk of a security by systematic risk and unsystematic risk.

The systematic risk arises from the basic variability of stock prices in general and is related to the

factors which influence all stocks to go together with the general market at least to some extent.

The unsystematic risk, is the variability in stock prices (and therefore, in returns from stocks) that

results from some factors which are specific to an individual company. Although the unsystematic

risk can be eliminated or reduced through diversification of portfolio, the systematic risk cannot be

eliminated in this manner. The systematic risk, is known as the market risk, is popularly

represented by the Greek letter.


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Volatility in the stock market is a matter of great concern for policy makers and investors. Large

fluctuations in the stock prices, which exhibit volatility, bring variation in the value of the

investors' portfolio. Stock market does not perform consistently in all economic situations.

Consequently, portfolio value of investors also undergoes changes depending upon the economic

conditions. Investors' expectations with respect to tangible and intangible economic fundamentals

tend them to inflow/outflow of their funds from stock market' which results volatility. Short and

long trends in stock market return and volatility with respect to market fundamentals can be

observed over a period of time. Day-to-day business operations, political, and social events cause

the short-term trend of volatility.

The high volatility is resultant to sudden change in standard deviation. Investors tend to change the

risk premium return of their portfolios with regard to changing macroeconomic fundamentals likeinflation, interest rate, exchange rate, and industrial production, which evolve the long-term trend

of volatility. Large variability in market fundamentals, which results long-term volatility in stock

market poses risk to those investors who keep their fund invested in the marketable securities like

common stocks for long period. There are two propositions, which affect the fancy of an investor,

e.g., risk and return.

Return includes both cash dividend and net increase or decrease in value of the investment. Risk

exhibits variability in the mean rate of return in response to corporate, economic or some general

events or forces.

Volatility is a symptom of a highly liquid stock market. Pricing of securities depends on volatility

of each asset. An increase in stock market volatility brings a large stock price change of advances

or declines. Investors interpret a raise in stock market volatility as an increase in the risk of equity

investment and consequently they shift their funds to less risky assets. It has an impact on business

investment spending and economic growth through a number of channels. Changes in local or

global economic and political environment influence the share price movements and show the state

of stock market to the general public. The issues of return and volatility have become increasingly

important in recent times to the Indian investors, regulators, brokers, policy makers, dealers and

researchers with the increase in the FIIs investment

REVIEW OF LITERATURE


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Balaban (1995) conducted research with the objective to study the term structure of volatility in

an emerging stock market of Turkey (developing country) through comparison of the realized

volatility and implied volatility by employing the daily observations of the Istanbul Securities

Exchange Composite Index (ISECI) for the period January 1988 to June 1994. The study revealed

that volatility increases faster than the square root of time, reflecting significant deviance from

random walk.

Galagedera and Faff (2003) conducted research with the objective to investigate whether the

risk-return relation varies, depending on changing market volatility and up/down market conditions

and to examine the empirical validity of a conditional three-beta CAPM. Three market regimes

based on the level of conditional volatility of market returns were specified low, neutral and

high. The market model was extended to allow for these three market regimes and a three-beta

asset-pricing model was developed and tested. The study revealed that the three betas correspond

to the low, neutral and high market volatility regimes specified by the threshold parameters.

Bothe, Fornauf and Henrizi (2006) studied the risk and return determination of stocks for

different companies in different market sectors with the objective to figure out and to show that

risk and therewith the return on a stock is related to certain market segments. The risk values and

its significance with the CAPM-model for Volvo, Ericsson and JM Company were analyzed. The

study revealed that Ericsson, a high tech company is a risky industry. It has a high beta value

which mirrors the high risk and high return. Volvo, an autAZomobile company with a beta value

little bit less than one, is safe. JM, a real estate industry with a very low beta, is very safe

Kumar (2007) conducted research with the objective to study and interpret the volatility in

different economic environment and to find out the factors responsible for generating volatility. It

also attempts to measure the quantum and spread of volatility by measuring the volatility of daily

and monthly returns in response to economic growth. The study revealed that Indian stock market

exhibits expected response to the growth rate of the economy. During the recession volatility ofboth daily and monthly returns were high, on the other hand, during the period of growth it was

low. And in the decline phase it is comparatively lower than the recession phase. The study also

revealed that Short-term volatility is resulting from the day-to-day operations of corporate and

market. The movement of long-term trend of volatility is consistent with the economic conditions.

It is largely determined in response to the growth rate of the economy


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Prabahar ,Dhinakaran, Pandian (2008) conducted research with the objective to study the return

and risk element of investing in Indian Information Technology industry stocks and intraday and

interday volatility by calculating the Beta values. The study revealed that the volatilities of stock

returns was higher than that of indices and the unsystematic risk of the IT stocks was much higher

than the systematic risk. The study also revealed that out of six securities under study, four

securities were very aggressive

Sarma and Sarmah (2008) conducted research with the objective to examine the stability of beta

using monthly data on returns of five stocks that formed a part of BSE Sensitivity Index for the

period December 2001 to November 2006 by using Chow test as Beta stability is a very important

tool for all investment decisions and plays a significant role in Risk measurement and

management. The study revealed that Betas are UMVUE (uniformly minimum variance unbiased

estimator) and rejected the Chow test stability of beta.

Pandian and Jeyanthi (2009) conducted research with the objective to analyze the return and

volatility of stocks of BSE Sensex and NSE Nifty for the period 1998 to 2008. The study revealed

that the stock market is at a record high and Commodity markets are at their strongest. The study

also revealed that bull phases earned decent returns and the bear phases incurred loss and in the

bull phases volatilities were lower than bear phases.

METHODOLOGY

This study is based upon Secondary data. The daily open, close, high and low prices has been used

for the purpose of analysis. Data has been taken from the Website of National Stock Exchange i.e.

www.nseindia.com.Data has been taken for past five years starting from 1st June 2004 to 30th June

2010. Risk and Return Analysis has been taken in case of S&P CNX Nifty Companies. Market

Index is S&P CNX Nifty. There are total 10 companies which has been selected for the purpose of

analysis on the basis of data availability. Return Model, Risk Model , Beta Model and T-test

models have been used. The Objectives of the Study are as first to measure and compare the return

of selected securities and return of market index, second to measure and compare the risk of

selected securities with the rest of the market and third to make cross sectoral analysis of risk and

return over a period of time. The Hypothesis are as there is a insignificant difference between the

security returns and market index return, there is a insignificant difference between the returns of
http://www.nseindia.com/http://www.nseindia.com/


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Financial sector securities and market index return, there is a insignificant difference between the

returns of Non-Financial sector securities and market index return

Analysis and Interpretation

MEASUREMENT AND COMPARISON OF SECURITY RETURNS AND MARKET INDEX

RETURN

Companies Total Return Average Return

S & P CNX Nifty 129.18 0.10

ACC 156.35 0.12

BPCL 83.88 0.07

HDFC 193.66 0.15

ITC 46.21 0.036

ONGC 97.15 0.077

Ranbaxy -66.09 -0.05

PNB 141.51 0.11

Reliance 201.59 0.16

SAIL 247.26 0.19

Wipro -33.63 -0.03

ACC, HDFC, PNB, Reliance and SAIL have more total and average returns as compared to the

Market index

BPCL,ITC and ONGC have less total and average returns as compared to the Market index

Ranbaxy and Wipro have negative total and average returns as compared to the Market index

MEASUREMENT AND COMPARISON OF SECURITY RISK AND MARKET INDEX

RISK


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Companies Variance Standard

Deviation (%)

S & P CNX Nifty 4596.06 67.79

ACC 7778.30 88.19

BPCL 9448.02 97.2

HDFC 10809.49 103.97

ITC 14513.87 120.47

ONGC 8483.71 92.11

Ranbaxy 13152.45 114.68

PNB 10125.56 100.63

Reliance 9216.91 96.01

SAIL 16838.07 129.76

Wipro 15711.96 125.35

All the securities have high total risk as compared to market index as indicated by the high

variance and standard deviation of all securities

CALCULATION OF BETA VALUES AND NATURE OF SECURITIES

Companies Beta Nature of Securities

S & P CNX Nifty

ACC -0.40 Defensive

BPCL 0.62 Defensive

HDFC 1.04 Aggressive

ITC 0.67 Defensive

ONGC 0.94 Defensive/Average

Ranbaxy 0.71 Defensive


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PNB 0.99 Defensive/Average

Reliance 1.15 Aggressive

SAIL 1.40 Aggressive

Wipro 0.95 Defensive/Average

Securities that have Beta values greater than 1 are Aggressive securities

Securities that have Beta values less than 1 are Defensive securities

Securities that have Beta values equal to 1 are Average securities

Financial sector securities are aggressive and average

Most of the Non-financial securities are Defensive

RETURN OF ALL SECURITIES AND

MARKET INDEX RETURN

One-Sample Statistics

N Mean Std. Deviation

Std. Error

MeanAverage Return 10 .0845 .07941 .02511

One-Sample Test

Test Value = .10

t df

Sig. (2-

tailed)

Mean

Differenc

e

95% Confidence

Interval of the

Difference

Lower Upper AverageReturn

-.617 9 .552 -.01550 -.0723 .0413

Test value is more than 0.05 which means there is a insignificant difference between the security

returns and market index return

Null Hypothesis is accepted


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FINANCIAL SECTOR (HDFC and PNB) SECURITIES RETURN AND MARKET INDEX

RETURN


One-Sample Test

Test value is more than 0.05 which means there is a insignificant difference between the returns of

financial sector securities and market index return


NON FINANCIAL SECTOR (ACC, BPCL, ITC, ONGC, RANBAXY, RELIANCE, SAIL,

WIPRO) SECURITIES RETURN AND MARKET INDEX RETURN


N Mean

Std.

Deviation

Std.

Error

Meanaverage

return2 .1300 .02828 .02000

Test Value = .10

T df

Sig. (2-

tailed)

Mean

Differenc

e

95% Confidence

Interval of theDifference

Lower Upper average

return1.500 1 .374 .03000 -.2241 .2841

N MeanStd.

Deviation

Std.

ErrorMean

average

return9 .0759 .08054 .02685


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One-Sample Test

Test value is more than 0.05 which means there is a insignificant difference between thereturns of non-financial sector securities and market index return


DATA OF ALL COMPANIES AND MARKET INDEX

Companies Total

Return

Average

Return

Variance Standard

Deviation

(%)

Covariance Coefficient

of

Correlation

Beta

S & P CNXNifty

129.18 0.10 4596.06 67.79

ACC 156.35 0.12 7778.30 88.19 -1857.38 -0.31 -0.40

BPCL 83.88 0.07 9448.02 97.2 2871.46 0.44 0.62

HDFC 193.66 0.15 10809.49 103.97 4782.08 0.68 1.04

ITC 46.21 0.036 14513.87 120.47 3101.54 0.38 0.67

ONGC 97.15 0.077 8483.71 92.11 4331.49 0.69 0.94

Ranbaxy -66.09 -0.05 13152.45 114.68 3273.90 0.42 0.71

PNB 141.51 0.11 10125.56 100.63 4543.50 0.67 0.99

Reliance 201.59 0.16 9216.91 96.01 5267.29 0.81 1.15

Test Value = .10

t dfSig. (2-tailed)

Mean

Difference

95% Confidence

Interval of the

DifferenceLower Upper

average

return-.898 8 .395 -.02411 -.0860 .0378


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SAIL 247.26 0.19 16838.07 129.76 6421.31 0.73 1.40

Wipro -33.63 -0.03 15711.96 125.35 4355.26 0.51 0.95

ACC :-

It has shown lower returns as compared to the S & P CNX Nifty which is indicated by

the high total and average return of S & P CNX Nifty as compared to total and average

return of ACC

It is more risky as it has high standard deviation

It has low negative Beta value which indicates negative relationship between the

returns of ACC and S & P CNX Nifty

The returns of ACC are negatively correlated with the returns of S & P CNX Nifty and

the correlation is very low

Low correlation between returns of ACC and S & P CNX Nifty results in lower Beta

Low Beta value indicates small Systematic risk and remaining large part of

unsystematic risk can be eliminated by Diversification

ACC is Defensive security as indicated by low negative Beta value less than 1

BPCL :-



return of BPCL



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It has low positive Beta value which indicates positive relationship between the returns

of BPCL and S & P CNX Nifty

The returns of BPCL are positively correlated with the returns of S & P CNX Nifty

and the correlation is low

Low correlation between returns of BPCL and S & P CNX Nifty results in lower Beta



BPCL is Defensive security as indicated by low Beta value less than 1

HDFC :-

It has shown higher returns as compared to the S & P CNX Nifty which is indicated by

the high total and average return of HDFC as compared to total and average return of S

& P CNX Nifty

It is very risky as it has high standard deviation

It has high positive Beta value greater than 1 which indicates positive relationship

between the returns of HDFC and S & P CNX Nifty

The returns of HDFC are positively correlated with the returns of S & P CNX Nifty

and the correlation is high

High correlation between returns of HDFC and S & P CNX Nifty results in higher Beta

High Beta value indicates large Systematic risk and remaining small part of


HDFC is Aggressive security as indicated by a high positive Beta value greater than 1


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ITC:-



return of ITC



of ITC and S & P CNX Nifty

The returns of ITC are positively correlated with the returns of S & P CNX Nifty andthe correlation is very low

Low correlation between returns of ITC and S & P CNX Nifty results in lower Beta



ITC is Defensive security as indicated by low Beta value less than 1

ONGC:-



return of ONGC


It has moderate positive Beta value which indicates positive relationship between the

returns of ONGC and S & P CNX Nifty


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The returns of ONGC are positively correlated with the returns of S & P CNX Nifty

and the correlation is moderate

The moderate level of correlation between returns of ONGC and S & P CNX Nifty

results in moderate Beta value

Moderate Beta value indicates moderate Systematic risk and remaining part of


ITC is Defensive security as indicated by Beta value less than 1

Ranbaxy:-



return of Ranbaxy



of Ranbaxy and S & P CNX Nifty

The returns of Ranbaxy are positively correlated with the returns of S & P CNX Nifty

and the correlation is low

The low level of correlation between returns of Ranbaxy and S & P CNX Nifty results

in low Beta value



Ranbaxy is Defensive security as indicated by Beta value less than 1

PNB:-


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the high total and average return of PNB as compared to total and average return of S &

P CNX Nifty


It has moderate Beta value nearly approaching 1 which indicates positive relationship

between the returns of PNB and S & P CNX Nifty

The returns of PNB are positively correlated with the returns of S & P CNX Nifty and

the correlation is moderate

Moderate level of correlation between returns of PNB and S & P CNX Nifty results in

moderate Beta



PNB is Defensive or Average security as indicated by a moderate positive Beta value

nearly approaching 1.

Reliance :-


the high total and average return of Reliance as compared to total and average return of

S & P CNX Nifty



between the returns of Reliance and S & P CNX Nifty


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The returns of Reliance are positively correlated with the returns of S & P CNX Nifty

and the correlation is high

High correlation between returns of Reliance and S & P CNX Nifty results in higher

Beta



Reliance is Aggressive security as indicated by a high positive Beta value greater than

1

SAIL:-


the high total and average return of SAIL as compared to total and average return of S

& P CNX Nifty



between the returns of SAIL and S & P CNX Nifty

The returns of SAIL are positively correlated with the returns of S & P CNX Nifty and

the correlation is high

High correlation between returns of SAIL and S & P CNX Nifty results in higher Beta



SAIL is Aggressive security as indicated by a high positive Beta value greater than 1

Wipro :-


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return of Wipro


It has moderate positive Beta value which indicates positive relationship between the

returns of Wipro and S & P CNX Nifty

The returns of Wipro are positively correlated with the returns of S & P CNX Nifty

and the correlation is moderate

The moderate level of correlation between returns of Wipro and S & P CNX Nifty

results in moderate Beta value



Wipro is Defensive security as indicated by Beta value less than 1

FINDINGS

1. The Beta values of HDFC, Reliance and Sail are greater than 1. They are Aggressive securitiesi.e. they are more risky than the Market

2. The Beta values of BPCL, ITC and Ranbaxy are very less than 1. They are Defensive securities

i.e. they are less risky than the Market

3. The Beta values of ONGC, PNB and Wipro are very near to 1. They are Defensive or Average

securities i.e. they are less or equally risky than the Market

4. The Beta value of ACC is negative. It is Defensive security i.e. it is less risky than the Marketbut it shows negative relationship between the returns of security and market

5. ACC, HDFC, PNB, Reliance and SAIL has more total and average returns as compared to the

Market index which indicates they generate more returns than the market


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6. All the securities have high total risk as compared to market index as indicated by the high

standard deviation of all securities

CONCLUSION

There is a insignificant difference between the security returns and market index return

There is a insignificant difference between the returns of Financial sector securities and market

index return

There is a insignificant difference between the returns of Non-Financial sector securities and

market index return

The risk of stocks was higher than the risk in market index as indicated by high standard deviation

of all stocks as compared to standard deviation of Market index

Financial sector securities are aggressive and average and Most of the Non-financial securities are

Defensive.

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