19-09-2014, 03:59 PM
A Study on Comparative Analysis of Risk and Return with reference to
Selected stocks of BSE Sensex index, India.
A Study.pdf (Size: 1.06 MB / Downloads: 11)
Abstract
The study aims to compare stocks of selected companies from different sectors like
Information Technology, Automobiles, Banking, Pharmaceuticals, and Oil Sectors in the
form of their risk, return and liquidity. The study also creating awareness about Stocks among
the investors to invest in the particular sectors. The risk/return relationship is a fundamental
concept in not only financial analysis, but in every aspect of life. If decisions are to lead to
benefit maximization, it is necessary that individuals/institutions consider the combined
influence on expected return or benefit as well as on risk/cost. The requirement that expected
return/benefit be commensurate with risk/cost is known as the "risk/return trade-off" in
finance. It discusses the trade-off using beta and standard deviations, coefficient of
correlation tools and provides a method for quantifying risk.
Introduction
Risk and return plays a key role in most individual investors‟ decision making
process. Every investor wants to avoid risk and maximize return. In general, risk and return
go hand in hand. If an investor wishes to earn higher returns than the investor must appreciate
that this will only be achieved by accepting a commensurate increase in risk. Risk and return
are positively correlated; an increase in one is accompanied by an increase in the other.
Investment decisions, therefore, involve a tradeoff between risk and return, which is
considered to be central to the investment decision making. In today‟s environment, it is
prudent for a rationale investor to look into the real interest on an investment as the inflation
is moving out of the gear. While investors like return they abhor risk. This necessitates for
optimization of risk and reward. Share provides investment opportunities depending on
investor‟s risk, return expectations.
Review of Literature
Treynor (1965) developed a methodology for evaluating the fund performance called
reward to volatility measure. In his path breaking study, Sharpe (1966) developed reward to
variability measure and found 11 funds reported superior performance out of 34 funds to that
of DJIA. Jensen‟s (1968) devised a measure based on CAPM and reported that mutual funds
did not appear to achieve abnormal performance when transactions cost were considered.
Fama (1972) developed a methodology for evaluating investment performance of managed
portfolios. He suggested that overall performance could be broken down into several
components.
Data and Their Sources
The study is based on comparing Stocks risk and return of ten Companies (TCS,
Maruti, SBI, Sun Pharma, ONGC & ACC, Bharathi Airtel Ltd, ITC, L&T, and Tata Power)
among SENSEX 30 companies in respect to their risk, return, beta and standard deviation.
However, with the objective and scope of the study in mind, it is decided to study on return
series of selected stocks. Monthly closing prices of the selected scripts are to be collected
from http://www.bseindia.com website. In order to avoid bias, at least three years monthly
data is decided to be necessary. The reference period is from Jan, 2008 to May 2011.
Conclusion:
As a whole the stock market is sometime highly volatile. Cyclical sectors like Banking
and Power sectors are having high risk. The non cyclical sectors like Pharmaceutical,
Housing related, FMCG having low risk. The cyclical sectors are those sectors which
generally move with the performance of the entire economy and the products of which are
highly price elastic and income.
Investors can find the best use of the beta ratio in short-term decision-making, where
price volatility is important. If you are planning to buy and sell within a short period, beta is a
good measure of risk. However, as a single predictor of risk for a long-term investor, the beta
has too many flaws. Careful consideration of a company‟s fundamentals will give you a