Airo International Research Journal September, 2016 Volume VII, ISSN: 2320-3714 Dr. Seema Shokeen Assistant Professor Department of Business Administration Maharaja Surajmal Institute, New Delhi Email ID : seemashokeen@msi-ggsip.org Abstract It is certainly true that risk and return plays a significant role in investment decision-making. The present paper investigates the industry-wise risk and return in Indian Stock Market with the help of Capital Asset Pricing Model (CAPM). The present study used daily adjusted closing prices of listed 225 securities of BSE-500. BSE-Sensitive Index has been used as market index. All the selected 225 securities have been divided into nineteen industries. The present study is for eleven years starting from 1 April 2005 to 31 March 2016. The study is based on the secondary data and the data relevant for this study has been collected from the Centre for Monitoring of Indian Economy (CMIE) prowess database software. It revealed that all the industries are showing positive return during the study period except the health care industry and house related industry. The study also reports that the highest beta is found in Power, Diversified, Telecom, Textile, Metal, Metal Products & Mining industry whereas Agriculture, Miscellaneous, FMCG and Media &Publishing have the least beta. Industry betas with a value more than one are generally related with expansion and higher risk industry. As a result, in the study the health care industry is less sensitive to broader market activities as compared to the Power industry during the study period. As far as this type of study is essential due to transitional economy. Therefore, this study will be valuable for interested parties, investors, researchers that contribute towards the perceptive of Indian stock market. Keywords: Bombay Stock Exchange (BSE), Capital Asset Pricing Model (CAPM), Investment, Risk, Return Introduction Stock Market in any country is considered as the hub of making equity investment. Stock Market also reflects the economic condition of any country. Moreover, in any financially developed country stock market is considered to be one of the alternatives to financing. Investors get into the stock
market primarily with a return seeking motive (Hasan 2011). During the last few years, Investors are looking for all time new investment opportunities in around the world. Today s in the changing environment, financial investors used many financial techniques to analyze the risk and return of securities. Capital Asset Pricing Model (CAPM) is one of the most important techniques to assess the risk and return of equities. The Capital Asset Pricing Model is the one of the most famous model used in the financial economics. It is the main model about the risk-return relationship in the literature. Capital Asset Pricing Model (CAPM) is a model that use for describing the relationship between risk and expected return. This model is also known as the standard model. In order to test the relationship between risk and return, there have been various researches in the past. The most important word that relates to the stock market is Investment. Investment plays a very important role in the development of any country. Everyone invests in order to improve future. The question concerned investment from Investors is, how securities are priced and this question is also linked with the two important aspects of investment decision one is risk and other one is return. Review of Literature Misra and Misra (2007) conducted a study to analyze the risk and returns of different sectors of Indian economy with the help of accounting and market based information. The study reported that Fast Moving Consumer Goods (FMCG), health care and oil & gas sectors were the most defensive sectors whereas metals and IT sectors were the most aggressive sectors in the Indian economy. They also concluded that market risk of different sectors of Indian economy was not stable over time. On the basis of accounting information the study proved that consumer durables and metal sectors were having the highest financial risk whereas Fast Moving Consumer Goods (FMCG), healthcare, IT and oil and gas sectors were having the least financial risk. The study also concluded that the financial risk was significantly captured by the market. Vikkraman and Varadharajan (2009) in their study analyzed the risk and return of Automobile industry in India (2004-2007). The empirical evidence shows that generally there is a high correlation between risk and return over longer periods of time. This relationship is known as risk return tradeoff. Among the five leading company in the
Airo International Research Journal September, 2016 Volume VII, ISSN: 2320-3714 Indian automobile industry, based on the risk-return trade-off MAHINDRA & MAHINDRA Motors could be considered to be the best company to invest in its shares. MAHINDRA Motors & MAHINDRA has a risk of 97.33% and return of about 7.5%. Even though TATA Motors and ASHOK LEYLAND has a higher risk level of 119.99% and 200.17% as an overall for the period of 4 years (2004-2007); then as per the Risk-return trade-off these companies should be producing a consolidated higher return but surprisingly the consolidated Expected return % is in negative as -8.6% and -13.84%. In the case of HINDUSTAN Motors, the expected return is around 128.29% with a relatively high risk level of 2092%, which is above normal. Hasan (2011) identified sector-wise return characteristics of selected stocks of Dhaka Stock Exchange. The study used 48 months return data of 126 stocks listed in the Dhaka Stock Exchange. The stocks had been divided in 10 different sectors and found individual sector s return and risk. The study found that the stocks in the Garments Sectors generated higher return. Stocks in the banking and insurance sectors also achieved higher return. The study also found that out of 10 sectors only return in the banking sector was significantly influenced by the macroeconomic conditions. Khan (2012) in their study by employing a sample of 20 companies concluded that the mean return of cement and chemical companies was linearly related to beta and risk during the study period 2007 to 2008. The selected companies represent the different industries such as banking industry, Insurance, Fuel and Energy sector, Cement Industry and Chemical Industry. Moreover, the study concluded that during the study period Pakistani stock market was showing the volatile market results and also reported that companies in the same sector did not have same beta risk. Rao, Goel and Kumar (2012) conducted a study on risk and return analysis in portfolio selection and investment decision. The study compared the performance of stocks with the performance of market and also compared the industry wise unsystematic risk and found the optimum portfolio. The study used the stocks listed in S&P CNX NIFTY and S&P 500. It used the daily closing prices from the period between 01-01-2010.to 31-12-2010. The study assumed that investment in banking stocks provide more returns than any other securities. The results of the found that portfolio-6
consisting of Tata motors, Axis bank, ICICI bank, HDFC bank, PNB and Infosys stocks had given high returns as compared to all the other portfolios and portfolio- 9 consisting of CIPLA, RANBAXY, IDEA, AIRTEL, INFOSYS and HCL had given high risk with very less returns. Qamruzzaman (2014) in their study assessed the risk and return relations of banking sector stock in the Dhaka Stock Exchange. For the purpose of assessing the relationship between risk and return, the study used a sample of 29 listed banks selected from the Dhaka Stock Exchange. The study used various statistical tools such as Jenson, Treynor, Sharpe s ratios for the purpose of assessing the risk return relationship. This study found that sample stocks was shown downward trend in regards to annualized monthly return in comparison to market return. As per this study, risk adjusted measures also showed that all stocks were under performing with less diversification opportunities. Correlation matrix showed that The City Bank and Uttara Bank Limited with 80% has an option to create portfolio. Rashinkar and U (2014) analyzed the market risk of selected banking stocks in terms of beta and also compared the market risk of selected banking stocks. The study covered market risk of five selected nationalized banks in the Indian context. In their study the stock prices and bank nifty movement for the period of 1 July 2013 to 30 th June 2014 had been considered for the calculations of Beta s of banks. The study found that the beta values for the different period varied from 0.96 to 1.77. The betas of state bank of India, Industrial development banks and Syndicate bank was negative which implied that these stocks moved against the market risk and less affected by market risk. The study also found that the betas of Punjab National Bank and Bank of Baroda are more than one. It indicated that these stocks were exposed to high market risk. Ashturkar and A.A. Bazi (2015) in their study analyzed the risk and return of some selected banks. The study used top 5 Indian banks in India. The study found that the level of credit exposure of top 5 Indian banks in the country and also found the level of non-performing assets as against the values of the total assets of the bank. The study used the following banks for the purpose of analysis State Bank of India, Punjab National Bank, Axis Bank, ICICI Bank, HDFC Bank. It concluded that India showed good growth as a developing
Airo International Research Journal September, 2016 Volume VII, ISSN: 2320-3714 country. The study showed that in the comparison of ICICI, Axis and HDFC bank appeared to be showed a better performance and one needed to take into account the size of state bank of India and Punjab National Bank to understood that the level of exposure they had in the market were higher as they were owned by the Govt. of India. The analysis also showed that the return in the banks and the net profit posted in the current year and all the banks showed higher return for all the banks except PNB whose nonperforming assets have increased by 87 percent. Sowjanya and Kothari (2016) examined the comparison of banking and auto sectors in India. In their study examined the relationship between return and risk of Indian stock markets. The study considered nine stocks as sample for the period during 2011 to 2015. The study calculated annualized return and risk to understand the relationship of volatility and reward. In their study, regression and t-test were run to compare the performance of two industries. The results of the study concluded that there were no differences in the performance of banking and auto stocks. In the light of above studies, the relevance of current study is enhanced and its findings will be valuable for interested parties, investors, researchers that contribute towards the perceptive of Indian stock market. Objectives of the Study To examine the risk and return of different sectors in the stock exchange of Bombay Stock Exchange-500 Research Methodology The present study used daily adjusted closing prices of listed 225 securities of BSE-500. BSE-Sensitive Index has been used as market index. The present study is for eleven years starting from 1 April, 2005 to 31 March, 2016 due to the transitional economy. The study is based on the secondary data and the data relevant for this study has been collected from the Centre for Monitoring of Indian Economy (CMIE) prowess database software. The present study focused the following industries such as health, agriculture, miscellaneous, FMCG, Media and Publishing, Consumer Durables, Chemical & Petrochemical, Capital Goods, Tourism, House Related, Finance, Transport Equipments, Information Technology, Oil & Gas, Metal, Metal
Products & Mining, Textile, Telecom, Diversified, Power. Daily return: Daily returns on securities are calculated by applying the following formula: - R it Pt ln *100 P t 1 Where R it is return on security i in time period t, P t is securities price at the time t, P t 1 is securities price at the time period t-1 Capital Asset Pricing Model: Expected return is calculated by using this equation: E( R i ) R f i E R m R f Where E R i = expected return R f = Risk free rate i = beta of the security i as Cov R, R VAR( R ) i m m m E R m = expected return on the market E R R = Market Premium f Industry-Wise Risk and Return We computed the industry s risk and return during the study period. In the study all the 225 securities have been grouped industrywise. Industry beta is simply the weighted average of the beta of different securities in that industry. The table also reports that the highest beta is found in Power (2.08), Diversified (1.10), Telecom (0.95), Textile (0.85), Metal, Metal Products & Mining (0.72) whereas health care (-0.23), Agriculture (0.01), Miscellaneous (0.25), FMCG (0.32) and Media &Publishing (0.36) have the least beta. The study revealed that the return generating capacity of different industries stocks are not uniform during the study period. The study revealed that the Power sector delivered the highest return to its investors and two other industries diversified and telecom were in second and third position by producing returns at the rate of 1.82 percent and 1.71 percent respectively. Sector betas with a value exceeding one are usually associated with growth and higher risk sectors and are attractive to risk-seeking investors searching for higher returns. Table 1
Airo International Research Journal September, 2016 Volume VII, ISSN: 2320-3714 Name of the Industry Industry-Wise risk and return in the Indian Stock Market (1 April 2005 31 March 2016) i i SE ER ( P ) Power 2.08-0.02 0.04 2.13 Diversified 1.10 0.01 0.04 1.82 Telecom 0.95-0.05 0.04 1.71 Textile 0.85 0.07 0.04 1.49 Metal, Metal Products & Mining 0.72 0.00 0.05 1.35 Oil & Gas 0.69 0.00 0.04 1.18 Transport Equipments 0.58-0.07 0.05 1.10 Information Technology 0.56-0.06 0.05 1.09 Finance 0.48 0.04 0.06 0.88 Capital Goods 0.41 0.06 0.06 0.83 Tourism 0.41-0.05 0.06 0.75 Chemical & Petrochemical 0.39 0.03 0.04 0.81 Consumer Durables 0.37 0.03 0.06 0.77 Media & Publishing 0.36-0.02 0.05 0.55 FMCG 0.32 0.03 0.04 0.54 Miscellaneous 0.25 0.04 0.05 0.41 Agriculture 0.01 0.05 16.01 0.25 House Related -0.12-0.04 0.06 0.21 Health Care -0.23 0.04 0.18 0.18
Figure 1 Industry-Wise Risk and Return in the Indian Stock Market (1 April 2006 31 March 2016) Figure 1 shows that the power industry has high beta value compare to all other industries. Return and Risk of Selected Industries 2.08 2.13 1.82 1.71 1.49 1.35 1.1 1.18 0.95 1.1 1.09 0.85 0.72 0.88 0.69 0.83 0.75 0.81 0.77 0.58 0.56 0.48 0.41 0.41 0.39 0.37 0.36 0.32 0.25 0.55 0.54 0.41 0.25 0.21 0.18 0.01-0.12-0.23 Conclusion and Scope for further research The study applied the Capital Asset Pricing Model (CAPM) for the purpose of examining the risk and return of different sectors. The present study used daily adjusted closing prices of listed 225 securities of BSE-500. All the selected 225 securities have been divided into nineteen industries. The present study is for eleven years starting from 1 April 2005 to 31 March 2016. The study is based on the secondary data and the data relevant for this study has been collected from the Centre for Monitoring of Indian Economy (CMIE) prowess database software. It revealed that all the industries are showing positive return during the study period except the health care industry and house related industry. The study also reports that the highest beta is found in Power, Diversified, Telecom, Textile, Metal, Metal Products & Mining industry whereas Agriculture, Miscellaneous, FMCG and Media &Publishing have the least beta. The limitation of this study is that it was used
Airo International Research Journal September, 2016 Volume VII, ISSN: 2320-3714 only the daily data and the results of the study may be different if the monthly data is to be applied. The further study may be attempted to focus on other stock exchanges. Moreover, further research could be made to analyze the risk and return of different securities on the basis of daily, weekly, monthly, quarterly, half yearly data, yearly data. There is a need to carry out more research regarding this study. References 1. Ashturkar, Prashant. P and A.A.Bazi, Abdulelah Mahmood (2015), An Evaluation and Analysis of the Risk/Return Profile of Selected Banks, International Journal of Enhanced Research in Science, Technology & Engineering, Vol. 4, Issue 8, pp. 37-43. 2. Hasan, Mostofa Mahmud (2011), Sector-Wise Stock Return Analysis: An Evidence from Dhaka Stock Exchange in Bangladesh, International Journal of Business and Management, Vol. 6, No. 6, pp. 276-285. 3. Khan, Muhammed Irfan (2012). Non-Standardized Form of CAPM and Stock Returns. International Journal of Business and Social Science, 3(2): 193-201. 4. Misra, Sangeeta D and Misra, Dheeraj (2007). Analysis of risk and returns: a study of Indian industrial sectors. Int. J. Indian Culture and Business Management, Vol.1, Nos.1/2, 28-47. 5. Qamruzzaman, Md (2014). Risk Return Trade Off: Evidence from Monthly Return of Banking industry in Dhaka Stock Exchange Pacific Business Review International. Vol. 6, Issue 12, pp.113-122. 6. Rao, K. Sambasiva., Goel, Shashank and Kumar, K. Phani (2012), A Study on Risk and Return in Portfolio Selection and and Investment Decision, Asian Journal of Research in Banking and Finance, Vol 2. Issue 3, pp. 23-35. 7. Rashinkar, Sunil M & U, Divya (2014), A Study on Market Risk Analyses of Selected Banking Stocks (Nationalized Banks) in Indian Context, Acme Intellects International Journal of Research in Management, Vol. 7, No. 7, pp. 1-7.
8. Sowjanya & Kothari, Anshul (2016), Analysis of Risk and Return: A Comparative Study of Banking and Auto Sector Stocks in India, International Journal of Marketing, Financial Services & Management Research, Vol. 5(4), pp. 1-16. WEBSITES www.bseindia.com www.yahoofinanceindia.com www.rbi.gov.in www.capitalmarket.com www.cmie.com www.pbr.co.in