Risk and Return Analysis

Topics: Stock market, Stock exchange, Stock Pages: 83 (26145 words) Published: May 18, 2013
Every investment is characterised by return and risk. The concept of risk is intuitively understood by investors. In general, it refers to the possibility of incurring a loss in a financial transaction. But risk involves much more than that. The word ‘risk’ has a definite financial meaning. The possibility of variation of the actual return from the expected return is termed risk. Corporate securities and government securities constitute important investment avenues for investors. These are traded in the securities market. The securities market is one of the most important sectors in the financial system of our country. And also contributes much for the economic development. So securities market act as a glittering avenue for potential investors. Investment in securities market also involves risk. The elements of risk may be broadly classified into two groups. The first group comprises factors that are external to a company and affect a large number of securities simultaneously. These are mostly uncontrollable in nature. The second group includes those factors which are internal to companies and affect only those particular companies. These are controllable to a great extent. The risk produced by the first group of factors is known as systematic risk, and that produced by second group is known as unsystematic risk. The systematic risk of a security can be measured by relating that security’s variability with the variability in the stock market index. A higher variability would indicate higher systematic risk and vice versa. The systematic risk of a security is measured by a statistical measure called Beta. But dealing with the beta, there is a problem of reliability. That is, to what extent the calculated value of beta is reliable.

This study deals with the beta estimation practice followed by Indian stock markets, with special reference to Bombay Stock Exchange. Study also looks in to the reliability of beta, of selected 30 companies from BSE. And test whether there is any reliability biasness.

The securities market is one of the most vibrant sectors in the financial system of our country, making an important contribution to economic development. India had a long and indigenous tradition of savings and entrepreneurship. Even when India was under foreign rule we were always quick to adopt and develop the most modern ways to channel savings into profitable business venture. No wonder, we set up the first stock exchange in Asia. Financial Markets, across the globe, are undergoing profound, exceptional and fast-paced changes. Technology has revolutionalised the processes and the security markets have been operating. The Indian securities market is in transition. There have been revolutionary changes over a period of time. In fact, on almost all the operational and systematic risk management parameters, settlement system, disclosures, accounting standards, the Indian securities market is fit enough to compete with the global standards. Indeed, on a few paradigms, it is ahead of the global benchmarks. The origin of the Indian securities market may be traced back to 1875, when 22 enterprising brokers under a Banyan tree established the Bombay Stock Exchange (BSE). Over the last 125 years, the Indian securities market has evolved continuously to become one of the most dynamic, modern and efficient securities markets in Asia. Today, Indian markets conform to international standards both in terms of structure and in terms of operating efficiency. Today India has two national exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Each has fully electronic trading platforms with around 9400 participating broking outfits. Foreign brokers account for 29 of these. There are some 9600 companies listed...
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