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risk & return of selected company securities traded in BSE Sensex

risk & return of selected company securities traded in BSE Sensex



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Published by Srinivasulu Ch

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Published by: Srinivasulu Ch on May 23, 2011
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Analytical study on the risk & return of selected company securities traded in BSE Sensex
Any rational investor, before investing his or her invertible wealth in the stock, analysesthe risk associated with particular stock. The actual return he receives from a stock may varyfrom his expected return and the risk is expressed in terms of variability of return. The downside 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 therisk help him to plan his portfolio in such a manner so as to minimize the risk associated withthe investment.
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 inexpensive yachts & famous villas to display their wealth. Most investors, however, are largelyguided by the pecuniary motive of earning a return on their investment. For earning returnsinvestors 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 avenuesavailable for investors today.Different people have different motives for investing. For most investors their interestin 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 returncommitment. Generally, investment in equity is considered to be more risky than investment indebentures & bonds. A closer look at risk reveals that some are uncontrollable (systematic risk)and some are controllable (unsystematic risk).
Analytical study on the risk & return of selected company securities traded in BSE Sensex
Return is the primary motivating force that drives investment. It represents the rewardfor 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 theinvestment 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 ismeasured 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 capitalreturn- it is simply the price appreciation (or depreciation) divided by the beginning price of theasset. For assets like equity stocks, the capital return predominates.Thus, the total return for anysecurity (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.
Analytical study on the risk & return of selected company securities traded in BSE Sensex
Investor cannot talk about investment returns without talking about risk becauseinvestment 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 lessthan 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 bemanaged 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 unsystematicrisk can be eliminated by use of a diversified portfolio, investors are not compensated for thisrisk.Systematic risks, also known as market risk, exist because there are systematic riskswithin the economy that affect all businesses. These risks cause stocks to tend to movetogether, which is why investors are exposed to them no matter how many different companiesthey own.Investors who are unwilling to accept systematic risks have two options. First, they canopt for a risk-free investment, but they will receive a lower level of return. Higher returns areavailable to investors who are willing to assume systematic risk. However, they must ensurethat they are being adequately compensated for this risk. The Capital Asset Pricing Modeltheory formalizes this by stating that companies desire their projects to have rates of return thatexceed the risk- free rate to compensate them for systematic risks & that companies desirelarger returns when systematic risks are greater. The other alternative is to hedge againstsystematic risk by paying another entity to assume that risk. A perfect hedge can reduce risk tonothing except for the costs of the hedge.
The market tends to move in cycles. A John Train says:

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Narmu Devan added this note
hi this project is very resourcefull...even i'm doing project associated with risk and return analysis in equity market...can someone tell me how to get the data of last years market return from jan31 to dec31plzzzz let me know soonnn....my mail id is: nedha.mba@gmail.com
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