RISK AND RETURN ANALYSIS OF COMMERCIAL

BANKS IN NEPAL

By
PASUPATI ADHIKARI
Prithvi Narayan Campus
Campus Roll No.166/070
T.U. Regd. No. 7-2-48-913-2010

A Thesis Submitted to
Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirements of the degree of

Master of Business Studies (M.B.S.)

Pokhara
November, 2018

i
 RECOMMENDATION
This is to certify that the thesis

Submitted by
PASUPATI ADHIKARI

Entitled

RISK AND RETURN ANALYSIS OF COMMERCIAL BANKS IN

NEPAL

has been prepared as approved by this Department in the prescribed format of the
Faculty of Management. This thesis is forwarded for examination.

Supervisor Head of Management Research Department

Name: Dr. Hari Prasad Pathak, Name: Indra Prasad Sharma,
Associate Prof. Associate Prof.
Signature: Signature:

Campus Chief
Signature
Date:

ii
 VIVA-VOCE SHEET

We have conducted the viva –voce examination of the thesis presented by

PASUPATI ADHIKARI

entitled
RISK AND RETURN ANALYSIS OF COMMERCIAL BANKS

IN NEPAL

and found the thesis to be the original work of the student and written according to
the prescribed format. We recommend the thesis to be accepted as partial
fulfillment of the requirement for

Master's Degree in Business Studies (M.B.S.)

Viva-Voce Committee

Head, Management Research Department …………………….………

Member (Thesis supervisor) …………………….………

Member (External expert) …………………….………

Date:
iii
 ACKNOWLEDGEMENTS

It is my great pleasure and satisfaction to present this research study in prescribed

form for partial fulfillment of the requirement for the degree of Master of Business
Studies under the Faculty of Management Tribhuvan University, Nepal. First of all,
I would like to acknowledge Tribhuvan University and its policy making unit for
providing this opportunity.

I wish to express my profound gratitude to my thesis supervisor, Dr. Hari Prasad

Pathak, Associate Professor, Prithvi Narayan Campus, Pokhara for his valuable
guidance for making this research work. His continual inspiration and support since
beginning has resulted in the completion of this research work. I would like to
express my sincere thanks to Prof. Keshar J. Baral (PhD), Indra Prasad Sharma,
Head of Research Department, Prithvi Narayan Campus, Pokhara. In this regard, I
express sincere thanks, to my wife, my best friends Bikash Acharya, Sagar Poudel
and staff member of Adarsha Offset Printers, Bagar, Pokhara.

I am solely responsible for any typing errors or omissions in this thesis.

PASUPATI ADHIKARI

iv
 TABLE OF CONTENTS

Acknowledgements
Page
CHAPTER-I INTRODUCTION
1.1 Background of the Study 1
1.2 Focus of the Study 4
1.3 Statements of the Problem 4
1.4 Objectives of the Study 5
1.5 Significance of the Study 5
1.6 Limitations of the Study 6
1.7 Organization of the Study 6

CHAPTER –II REVIEW OF LITERATURE

2.1 Conceptual Review 7
2.2 Review of Related Studies 30
2.3 Research Gap 34

CHAPTER-III RESEARCH METHODOLOGY

3.1 Research Design 35
3.2 Nature and Sources of Data 35
3.3 Population and Sample 35
3.4 Data Collection and Techniques 36
3.5 Data Analysis Tools 36

CHAPTER-IV PRESENTATION AND ANALYSIS OF DATA

4.1 Data Presentation and Analysis 43
4.1.1 Analysis of annual rate of return and average rate of return of
sampled banks 43
4.1.2 Comparative analysis of return of sampled commercial banks 52
4.1.3 NEPSE index and market return 53
4.1.4 Commercial banks return 54
4.1.5 Treasury bills return analysis 56
4.1.6 Comparative risk and return analysis of sampled bank 57
4.1.7 Compare the required rate of return and expected rate of return to
analyze the over and under price of commercial banks 58
4.1.8 Correlation between risk and expected rate of return 58
4.2 Major Finding of the Study 59

CHAPTER-V SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary 62
5.2 Conclusions 63
5.3 Recommendations 64

Bibliography
Annexes

v
 LIST OF TABLES

Table Page
4.1 Annual Returns and Average Rate of Return of HBL 44
4.2 Annual Returns and Average Rate of Return of EBL 46
4.3 Annual Returns and Average Rate of Return of MBL 48
4.4 Annual Returns and Average Rate of Return of SBL 50
4.5 Comparative Return Analysis of Sampled Commercial Banks 52
4.6 NEPSE Indexes and Market Returns 53
4.7 Returns of Commercial Banks 55
4.8 Returns of Treasury Bills 56
4.9 Comparative Risk and Return Analysis of Sampled Banks 57
4.10 Required Rate of Return and Expected Rate of Return Evaluation 58
4.11 Correlation Between Risk and Expected Rate of Return 58

vi
 LIST OF FIGURES

Figure Page
4.1 Trend Line of Closing Price of HBL 45
4.2 Trend Line of Annual Return of HBL 45
4.3 Trend Line of Closing Price of EBL 47
4.4 Trend Line of Annual Return of EBL 47
4.5 Trend Line of Closing Price of MBL 49
4.6 Trend Line of Annual Return of MBL 49
4.7 Trend Line of Closing Price of SBL 51
4.8 Trend Line of Annual Return of SBL 51
4.9 Trend Line of Annual Return of Sampled Commercial Banks 53
4.10 Trend Line of NEPSE Index 54
4.11 Trend Line of Commercial Bank Index 55

vii
 ABBREVIATION

A.D. : Anno Domini

ASBA : Applications Supported by Blocked Account
B.S. : Bikram Sambat
CAPM : Capital Assets Pricing Model
CARE : Credit Analysis and Research
C-ASBA : Centralized Applications Supported by Blocked Account
CDS : Credit Default Swap
CML : Capital Market Line
CRNL : CARE Rating Nepal Limited
CV : Coefficient of Variation
DEMAT : Dematerialized
EBL : Everest Bank Limited
F/Y : Fiscal Year
HBL : Himalayan Bank Limited
ICRA : Investment Information and Credit Rating Agency
IPO : Initial Public Offering
Ltd. : Limited
MBL : Machhapuchchhre Bank Limited
NEPSE : Nepal Stock Exchange
NIDC : Nepal Industrial Development Corporation
NRB : Nepal Rastra Bank
OTC : Over The Counter
P.E : Probable Error
SBL : Siddhartha Bank Limited
SEA : Security Exchange Act
SEBON : Security Exchange Board of Nepal
SMC : Security Market Center
SML : Security Market Line

viii
 CHAPTER- I
INTRODUCTION

1.1 Background of the Study

Economic growth is the major force for the development of the country and the economic
development is jointly determined by various factors. Industrialization is one of the most
important factors for the economic development of any country. This statement is justified
by the size and quality of the economy of the present industrialized nations.

Like blood is necessary for human beings, finance is for business organizations and
industries. Each and every business organization should base their decision making in
financial management. Financial management is mainly concerned with the acquisition and
utilization of funds. For this, financial market plays vital role in utilizing financial resources
for expanding productive sectors in the country. It mobilizes unproductive and unutilized
financial resources towards productive sectors and helps in expanding economic growth of
the country.

For the smooth running of the financial system, there should be the appropriate market for
such system which is called financial market. It is the market where financial claims and
financial services are traded. The market consists of two major areas which are capital
market and money market.

Capital market refers to a market that is concerned with long term investments. It is
facilitated with the borrowing and lending of long term funds. The major components of
capital market are stock exchange, investment institutions, industrial banks, insurance
companies, joint stock companies, etc. It deals with long term instruments. It is the main
market for the formation of the capital.

Money market refers to a market that is concerned with purchase and sale of money.
Liquidity is the commodity that is traded in the money market. It deals with all the financial
papers like treasury bills, commercial bills, certificated of deposits etc. The main function
 2

of the money market is to provide working capital for the corporations as well as to supply
funds for individuals and institutions on the short-term basis. Commercial banks are one of
the strong players in the money market as its main operation is to lend money.

A bank is a financial institution that accepts deposits from the public and creates credit.
Lending activities can be performed either directly or indirectly through capital markets.
Due to their importance in the financial stability of a country, banks are highly regulated in
most countries. Most nations have institutionalized a system known as fractional reserve
banking under which banks hold liquid assets equal to only a portion of their current
liabilities (Wikipedia, 2016). In addition to other regulations intended to ensure liquidity,
banks are generally subject to minimum capital requirements based on an international set
of capital standards, known as the Basel Accords.

Banking in its modern sense evolved in the 14th century in the prosperous cities
of Renaissance Italy but in many ways was a continuation of ideas and concepts
of credit and lending that had their roots in the ancient world (Business, 2017)

Commercial banks deal with other people's money. They have to find ways of keeping their
assets liquid so that they could meet the demands of their customers. In this anxiety to make
profit, the bank cannot afford to lock up their funds in assets, which are not easily releasable.
The depositors must be made to understand that the bank is fully solvent. The depositor's
confidence should be secured only if the bank is able to meet the demand for cash promptly
and full. The banker has to keep adequate cash for this purpose. Cash is an idle assets and
the banker cannot afford to keep a large possession of his/her assets in the form of cash.
Cash brings in no income to the bank. Therefore, the bankers have to distribute his/her assets
in such a way that s/he can have adequate profits without sacrificing liquidity (Radhaswamy
& Vasudevan, 1979).

Risk is defined in Webster's dictionary as a hazard a peril: exposure to loss or injury.

Therefore, risk refers to chance that some unfavorable event will occur. Most people view
risk is the matter. Risk is the just described a chance of loss in reality, risk occurs when the
something’s cannot be certain about the outcome of a particular activity or event (Merriam-
Webster, 2018). Systematic and unsystematic risk are the two main components of risk.
Economic and political instability, economic recession, macro policy of the government etc.
 3

affects the price of all shares systematically. Thus the variation of return of shares, which is
caused by these factors, is called systematic risk. Unsystematic risk can be described as the
uncertainty inherent in a company or industry investment. Types of unsystematic risk
include a new competitor in the marketplace with the potential to take significant market
share from the company invested in, a regulatory change.

The return is the total gain or loss experienced on an investment over a given period of time.
It is commonly measured as cash distributions during the period plus the change in value,
expressed as a percentage of the beginning-of-period investment value (Gitman, 2003). It is
also understood as expected positive cash flow generated from an investment. Investors are
concerned primarily with growth. They would seek project that offer the promise of long
term, higher than average growth of sales, earnings and capital appreciation. Return is also
defined as the difference between outflow and inflow of funds.

As an investor, it is important to understand the concept of risk versus return. With a clear
understanding of risk and reward, investors can select the investments for the portfolio that
provide them with a comfortable level of risk and return. Understanding risk and return will
allow an investor to create a portfolio that is diversified. Diversification of a portfolio is a
strategic way of investing which allows the spread risk of investment amongst many stocks
or bonds. Before investing in stocks and bonds, investors must understand what exactly they
are investing into and know their tolerance level for risk. Some investors are in the market
for a fast, high-risk return while others are more comfortable with a long-term steady
investment approach. The only wrong investment option is the one that makes the investor
feel outside their comfort zone.

Risk analysis and risk management has got much importance in the Nepalese economy
during this liberalization period. The foremost among the challenges faced by the banking
sector today is the challenge of understanding and managing the risk. The very nature
of the banking business is having the threat of risk imbibed in it. Banks' main role is
intermediation between those having resources and those requiring resources. For
management of risk at corporate level, various risks like credit risk, market risk or
operational risk have to be converted into one composite measure. Therefore, it is necessary
that measurement of operational risk should be in done with other measurements of
credit and market risk so that the requisite composite estimate can be worked out.
 4

The importance of analysis of risk and return for bank is easy financial lending and to find
out the possible areas of investment in the financial market.

1.2 Focus of the Study

The purpose of the investment must be made clear before the selection from among the
available alternatives. Generally, most investments are undertaken to provide an increase in
wealth. The higher level of desired wealth, higher returns that must be received. An investor
seeking higher returns must be will to face higher level of risk.

The degree of risk may be lower for the conservative financial manager and it is higher for
an aggressive financial manager. Risk needs to be measured in an objective way in order to
known whether it justifies a specific rate of return. An investor required a higher return from
a risky project in order to compensate of the risk. The main aim is to maximize the returns
with given level of risk or to minimize the risk with a given level of return. Therefore, for
this purpose that returns and risks need to be measured.

This study has focused on the analysis of risk and return associated with the share price of
the commercial banks. Risk and return of commercial banks are fully based on the portfolio
analysis. Therefore, this study is also focus on the analysis of risk and return how an investor
should take investment decision in share of commercial banks in Nepal.

1.3 Statement of the Problem

Investors purchase financial assets such as shares or bonds because they desire to increase
their wealth i.e. earn a positive return on their investment. The future is uncertain, investors
do not know about the rate of return their investment will realize. The commercial banks
invests different kinds of their subject because they will generate some benefits in future.
The investors do not measure return and various risk involves in their investments and
investor are able to know the price situation of listed companies.
After the restoration of democracy, Nepal government initiated open market policy in
country. As a result numbers of public limited companies are increasing. Such institutions
are providing banking services, participating in developing works, manufacturing,
processing and other services. But recent trend shows that all economic activities are not
operating properly in Nepal, due to different causes such as unnecessary political regulation,
political violence and different topography, lack of proper evaluation by the government or
 5

central banks, controversy policy of government and so on. Commercial banks are facing
different problems and couldn't be exception as other economic institutions. The main
problems is that the public companies cannot perfectly analyzed the risk and return of
market situation. Investors do not have any idea of risk and return. In our country the
commercial banks are playing vital role in the capital markets, risk and return and other
different kinds of areas. Most of people deposit their money in bank instead of investment
in financial assets such as share, bond and debenture. A lot of investors do not know how to
make investment and how to calculate risk and return on their investment.
In this background the risk and return situation of commercial banks has been analyzed. The
analysis of systematic and unsystematic risk position also helped to make investment
decision to minimize the risk. So, the researcher has following questions for the study:
a. What is the average rate of return of the commercial banks?
b. What is the market rate of return and beta of commercial banks?
c. What is the systematic and unsystematic risk of commercial banks?
d. What is the total risk and return position of the commercial banks?
e. What is the price moment of commercial banks?

1.4 Objectives of the Study

The general objective of this study is to analyzed risk and return of commercial banks. The
specific objectives of the study are as follows:
a. To identify the annual average rate of return of commercial banks.
b. To analyze the market rate of return and beta?
c. To examine the systematic risk and unsystematic risk of commercial banks.
d. To analyze the total risk and return position of commercial banks.
e. To compute the over and under price of sampled commercial banks.

1.5 Significance of the Study

This study has been beneficial for the entire person who is interested to know about the
capital market and commercial bank. The study suggests for a careful judgment of risk and
return relationship. The study also suggests that for a careful judgment of systematic and
unsystematic risk of commercial banks. This study gives information about Nepalese capital
market analyzing risk and return. It also contributes to increase the analytical power of the
investors in capital market.
 6

1.6 Limitation of the Study

Every research naturally has some limitations. So, this study is not an exceptional case, the
major limitation of the study are: -
a. The study covers the relevant data and information only for 10 years.
b. Analysis is based on the tools developed in the context of efficient market condition.
c. Time and finance constraints are also the major limitation of the study.
d. This study mainly focuses on risk and return of Himalayan Bank Ltd., Everest
Bank Ltd., Machhapuchchhre Bank Ltd., and Siddhartha Bank Ltd.

1.7 Organization of the Study

This study has been classified into five chapters.
The first chapter is Introduction chapter includes the background and information of the
subject matter of research. It is providing a general idea of its history. Similarly, it also
includes statement of problem, objectives of the study, significant of the study and limitation
of study and organization of the study as so on.
The second chapter is Review of Literature. It includes review of literature that relate with
the present study. This includes: review of journals, review of articles and previous
unpublished master degree thesis.
The third chapter deals with the methodology used in this study. It includes research design,
population and sample selection, nature and sources of data which are primary and
secondary, data processing procedure, and tools for the analysis, methods of analysis and
presentation.
The fourth chapter is the main body of the research. It includes presentation, interpretation
and analysis of data. It brings out major finding and result of this study. Various tools have
been used to interpret the data such as financial tools and statistical tools.
The last chapter of the study covers the summary, the main conclusion that results from the
study and offers recommendation on the basis of findings and provides guidelines for the
further study.
At the end of the study annex, bibliography, reference and list are attached.
 7

CHAPTER-II
REVIEW OF LITERATURE

This chapter presents the review of relevant theoretical literature and previous relevant
studies. It is divided into three parts: conceptual review, review of related studies and
research gap. Conceptual review includes definitions and summary taken from different
books and journal articles and research review includes the review of the article published
in different journals and past study reports and thesis.
2.1 Conceptual review
2.2 Review of related studies
2.2.1 Review of articles and journals
2.2.2 Review of previous thesis
2.3 Research gap
2.1 Conceptual Review
This section presents the conceptual aspects of the study. It includes the concepts of
investment on securities, risk and return.

2.1.1 Concept of Commercial Bank

A commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes business, personal and mortgage loans, and offers basic financial
products like certificate of deposit and saving accounts to individuals and small businesses.
A commercial bank is where most people do their banking, as opposed to an investment
bank (Investopedia, 2013).

A commercial bank is business organization that receives and holds deposits of fund from
others makes loans or extends credits and transfers funds by written order of deposits, (The
Encyclopedia Americana, Grolier Incorporated, 1984).
 8

A commercial banker is a dealer in money and substitute for money such as cheque or bill
of exchange. It also provides a variety of financial services (The New Encyclopedia
Britannia, 1985).

Commercial Bank Act 2031 B.S of Nepal has defined that “A commercial bank is one
which exchanges money, deposits money, accepts deposits, grants loans and performs
commercial banking functions and which is not a bank mean for cooperative, agriculture,
industries for such specific purpose” (Commercial Bank Act, 2031).

But, recently, Bank and Financial Institutions Act 2074 B.S (2017 A.D.) has accumulated
the five banking acts including commercial bank act 2031(1974 A.D.), which defines the
bank with respect to their transactions. This act is trying to categories the banking
institutions in four ways that is based on their transactions. According to this act, “bank is
the institution which performs its transaction under the provisions mentioned on section 47
of this act” (Bank and Financial Institutions Act, 2074).

Commercial bank makes money by providing loans and earning interest income from those
loans. The types of loans a commercial bank can issue vary and may include mortgages,
auto loans, business loans and personal loans. A commercial bank may specialize in just one
or a few types of loans.

2.1.2 Development of Capital Market in Nepal

The history of securities market began with the floatation of shares by Biratnagar Jute Mills
Ltd. and Nepal Bank Ltd. in 1937. Introduction of the Company Act in 1964, the first
issuance of government bond in 1964 and the establishment of Securities Exchange Center
Ltd. in 1976 were other significant development relating to capital markets. Securities
Exchange Center was established with an objective of facilitating and promoting the growth
of capital markets. Before conversion into stock exchange it was the only capital markets
institution undertaking the job of brokering, underwriting, managing public issue, market
making for government bonds and other financial services. Nepal Government, under a
program initiated to reform capital markets converted Securities Exchange Center into
Nepal Stock Exchange in 1993 (Wikipedia, 2017).
 9

Trading of governmental bond have always felt a security of capital market and in 1964,
industrial policy was promulgated. This policy has opened the doors for the establishment
of an institution named Security Market Center (SMC) in 1977 with its primary aim of
developing the capital market for government securities in the country under the joint effort
of Nepal Industrial Development Corporation (NIDC). It was converted into security
exchange center in 1976 Security Exchange Act (SEA) was approved by legislature and
value into existence with effect from 13th April 1984. The former Securities Exchange
Center was Nepal Stock Exchange with the major objective to arrange marketability and
liquidity to the government and corporate securities. Floor trading through market
intermediaries such as brokers and market makers has also evolved. Restoration of
democracy following the political movement of 1990 has brought lots of reforms in the
financial sector liberalization in the real sense was initiated. Nepal launched extended
structural adjustment programming 1992 by taking 'Extended Structural Adjustment
Facility' (ESAF) through first amendment in the SEA. This has led to the establishment of
securities board and it was given the responsibility of regulating and developing the
transactions of stock and bonds in the floor thorough its member intermediaries. NEPSE
presently has 59 brokers and 16 issues manager. In secondary market currently there are 226
listed companies (Nepal Stock Exchange, 2018).

2.1.3 Concept of Investment

The investment environment refers to all internal and external forces, which have a bearing
on the functioning of investment decisions. It encompasses the kinds of marketable
securities that exist ad where and how they are bought and sold through the brokers network
and financial intermediary (Sharpe, 2002). Securities normal any other financial certificates
issued by the companies to general public. These certificates are issued as certain price
called per value and are transferable form one person to another. In simple way, securities
can be understood as the promissory paper that the company gives to the investor after
receiving certain rupees as loan or share.
An investor can invest on any kinds of the securities for the long-term return. He or she can
make investment on shores, debenture or any other financial assets. But a rational investor
must think about the risk and return on his/her investment. Before making any type of
investment, rational investor must analyze risk and return. Normally almost investors are
risk averters so, risk analysis is very important for investment.
 10

There are many varieties of securities available in the market. A market where securities
like stock bonds are traded is known as security market. Security, market facilities the
process of transferring funds from savers to investors. People requiring money is bought
together with those having surplus money in the securities market. Security markets are also
known as mechanism created to facilitate the exchange financial assets. Therefore, the
market exists in order to bring together the buyers and sellers of securities. There are many
ways in which securities market can be classified.
i. On the Basis of Securities Traded
On the basis of securities traded security market can be classified in to Primary
market and Secondary market.
 Primary Market: - Financial securities which are offered for the first time in market
are called primary market. The primary market securities are the new issue market,
which bring together the "supply and Demand" or sources and issues for new capital
fund. In this market the principal source of fund is the domestic saving of individuals
and business, other supply includes foreign investors and Governments.
 Secondary Market: - The market where the existing and pre- developed securities
are bought and sold is called secondary market. In other words, the secondary market
is a market for old securities i.e. the securities which have already been listed in the
stock exchange. Nepal stock exchange (NEPSE) is an Example of secondary market
in Nepal, which is nonprofit organization operating under the Securities Exchange
Act 1983. The basic objective of NEPSE is to import free marketability and liquidity
to the government bonds and corporate securities by facilitating transactions in its
trading floor through market intermediaries such as brokers, market marker’s.
Members of NEPSE are permitted to act as intermediaries in buying and selling of
government bonds and listed corporate securities.
ii. On the Basis of Maturity of the Security
On the basis of maturity period security market can be classified into:
 Money market
 Capital market
 Money market: - The money market refers to the market in which short term
financial assets are traded. Money market typically involves financial assets that
have a lifespan of one year or less. The bill of exchange, commercial paper,
 11

certificate of deposits, treasury bills are the example of short term financial assets
which are marketable highly liquid and low risk.
 Capital market: The capital market is the market for long-term securities. Securities
mature in more than a year known as long term securities. Capital market is that
market where anybody or individuals. Whether incorporated or not, constituted for
the purpose of regulating or controlling the business of selling or dealing in
securities. The examples of long-term securities are common stock, debenture and
long-term bonds of the government.

2.1.4 Investment Options in Nepal

Investment generally refers to spending capital or money in productive sectors with the sole
purpose of earning profits and wealth. Nepal has a growing financial market there are many
short term and long term financial instruments are available to investors. The investment
options mainly available in Nepalese financial markets are as follows:

Common Stock
Common stock is a security that represents ownership in a corporation. Holders of common
stock exercise control by electing a board of directors and voting on corporate policy.
Common stockholders are on the bottom of the priority ladder for ownership structure; in
the event of liquidation, common shareholders have rights to a company's assets only after
bondholders, preferred shareholders and other debtholders are paid in full.
Organized stock exchange in Nepal is NEPSE. Currently 226 companies’ common stocks
are listed for secondary market trading. OTC is also the market for trading common stock
in Nepal. It is the main financial instruments for investment to the investors.

Preferred Stock
A preferred stock is a class of ownership in a corporation that has a higher claim on its assets
and earnings than common stock. Preferred shares generally have a dividend that must be
paid out before dividends to common shareholders, and the shares usually do not carry
voting rights.
 12

It is a hybrid financial instrument, which provides a fixed rate of return to investors and
assumed to be less risky than common stock. In Nepal, 13 companies has issued preferred
stock.

Bond / Debenture
In context of Nepal, bonds are largely inactive and occupy lesser portion of the total capital
market. Bonds (government and corporate) constitute of 12.76 percent of the paid up capital
of listed securities; equity being the highest in proportion (87.23 percent) and remaining in
mutual funds (0.00583 percent) and preferred stock (0.00093 percent), (NEPSE, 2013).
With high concentration of banks and financial institutions in financing the debt needs, the
importance of bond market is even more eminent considering the need to invest for
infrastructure development projects like hydropower, real estate, construction,
transportation, etc. (Vaidya, 2015)

Treasury Bills
Treasury bill, popularly known, as T-bill is one of the most widely used short-term money
market instruments in Nepal. A treasury bill is a short-term money market security issued
by the Public Debt Department of the Nepal Rastra Bank (NRB) on behalf of the Nepalese
government, to fulfill its short-term financial requirement. It has term to maturity ranging
from 27 days to 364 days. It is one of the safest securities since it has zero default risk (being
a government security or sovereign paper) and is the most marketable or tradable security
in Nepalese money market. The treasury bill are issued with a minimum denomination of
Rs.100,000 and goes up from that minimum in increments of Rs.5,000. The chief demanders
of Treasury bills are commercial banks and others. The central bank, NRB is the biggest
financer of treasury bills (with 23.59 percent as of November 22, 2009). The treasury bills
in Nepal are issued weekly or monthly especially the 52-weeks treasury bills are issued bi-
monthly i.e. twice a month. However, the most common type of T-bill used in Nepal is the
91-days, 182 days and 394 days T-bills. The treasury bills in Nepal are issued on a
discounted basis. Hence, the return to the investor is the difference between the maturity
value and the issue price.

Mutual Funds
Mutual Fund is a relatively new investment concept for many people in Nepal though it is
very much popular and has been in practice for decades in developed economies. Mutual
 13

Funds pool money from investors and invest that in a diversified portfolio of assets. In Nepal
mutual funds that pool money from people and invest that in different assets such as stocks,
bonds, fixed deposits etc. Mutual funds have certain advantages such as:
 People with small fund (even Rs1000) can invest.
 People with less knowledge of investment in stocks can invest.
 People with less (or no) time for stock analysis and investment decisions can
invest.
Currently, there are 12 mutual fund companies in Nepal such as Siddhartha Equity Oriented
Scheme (SEOS), Laxmi Value Fund (LVF), Nabil Balanced Fund (NBF), NMB Sulav
Investment Fund (NMBSF), Global IME Samunnat Scheme (GIMES), NIBL Sambriddhi
Fund (NIBSF), Nabil Equity Fund (NEF), NMB Hybrid Fund (NMBHF), NIBL Pragati
Fund (NIBLPF), Laxmi Equity Fund (LEMF), Siddhartha Equity Fund (SEF) and
Siddhartha Investment Growth Scheme (SIGS).

2.1.5 DEMAT Account

A DEMAT account is used to store the company shares that you own in dematerialized
form. That means that the physical share certificates that we used previously will be
converted and stored in a digital form. The account capable of holding such shares is known
as a DEMAT account. The same account is used for share transactions. Now, when you buy
and sell stock in the primary (IPO) as well as secondary markets (via brokers), you need to
have a DEMAT account. This has made it possible for quicker transactions and ownership
transfer. Find a company providing the service. For example: Kriti Capital, NIBL Capital,
NMB Capital, Global IME Capital and other Capital markets as well as your stock broker’s
office.
 Fill up the form. You will need an attested Nepali citizenship photocopy and a
passport size photograph for the form.
 Submit the form.
 It will usually take a few days for them to set it up. You will receive a share
checkbook so that you can sell shares.
 Take the physical share certificates to the place where you opened your DEMAT
account.
 Fill up a dematerialization request form with the correct signature for the DEMAT
account as well as the signature that is in the company.
 Submit the form.
 14

2.1.6 Credit Rating Agencies

ICRA Nepal Limited (ICRA Nepal), the first Credit Rating Agency in Nepal, is a subsidiary
of ICRA Limited (ICRA) of India. It was incorporated on November 11, 2011 and granted
license by the Securities Board of Nepal (SEBON) on October 3, 2012. ICRA Nepal is
supported by ICRA Limited through a technical support services agreement, which
envisages ICRA helping ICRA Nepal in such areas as rating process and methodologies,
analytical software, research, training, and technical and analytical skill augmentation
(ICRA Nepal, 2012).

CARE Ratings Nepal Limited (CRNL) is incorporated in Kathmandu, Nepal and is the
second credit rating agency to be licensed by the Securities Board of Nepal in November
16, 2017. CRNL will provide credit ratings and related services in the geography of Nepal.
The rating services of CRNL will include rating of debt instruments, IPO grading, issuer
rating, bank loans and facilities and related obligations covering a wide range of sectors.

2.1.7 ASBA and C-ASBA

ASBA means applications supported by blocked amount. ASBA is an application containing
an authorization to block the application money in the bank account, for subscribing to an
issue. If an investor is applying through ASBA, his/her application money shall be debited
from the bank account only if his/her application is selected for allotment after the basis of
allotment is finalized, or the issue is withdrawn/failed. It is a supplementary process of
applying in initial public offers (IPO) and follow on public offers (FPO) made through book
building route and co-exists with the current process of using cheque as a mode of payment
and submitting applications (Wikipedia, 2009).

Investors will be able to buy primary and rights shares online after the centralized
application supported by blocked amount (C-ASBA) process is implemented on February
23, 2018 in Nepal. The new system is expected to reduce hassles for investors, issue
managers and the banks through which investors submit their applications to buy shares on
the stock exchange. C-ASBA is an advanced form of the existing ASBA interface, which is
claimed to be more users friendly. Last year, the Securities Board of Nepal (SEBON)
launched the ASBA process that enabled investors to apply to buy shares of listed companies
through their bank accounts. Until recent, investors need to make a trip to their bank to fulfil
the documentation procedure to buy rights shares and shares issued in initial public offerings
 15

and further public offerings. Currently an advanced system is implemented. Now, investors
will receive their login identity from the concerned bank, which will allow them to apply
for primary shares over the internet. To use the online system, investors need to obtain a C-
ASBA registration number (CRN) from the concerned bank that will provide them access
to Mero Share, a field in the online form of CDS and Clearing (The Kathmandu Post, 2018).

2.1.8 Security Analysis

Security analysis is closely linked with portfolio management. The main objective of
Security analysis is to appraise the intrinsic value of security. There are two basic
approaches to security analysis as follows.
 Fundamental Approach, and
 Technical Approach

Fundamental Approach
The fundamental approach suggests that every stock has an intrinsic value, which should be
equal to the present value of the future stream of income from that stock discounted at an
appropriate risk related rate of interest. Estimate of real worth of a stock is made by
considering the earnings potential of firm, which depends upon investment environment and
factors relating to specific industry, competitiveness, quality of management. Operational
efficiency, profitability, capital structure and dividend policy. Thus, security analysis is
done to evaluate the current market value of particular security with the intrinsic or
theoretical value. Decisions about buying and selling an individual security depend upon
the conferred relative value. Since this approach is based on relevant facts, it gives true
estimate of the value of a security and it is widely use in estimation of security prices.

Technical Approach.
The other technique of security analysis is known as technical approach. The basic
assumption of this approach is that the price of a stock depends on supply and demand in
the market place and has little relationship with its intrinsic value. All financial date and
market information of a given security is reflected in the market price of a security.
Therefore, an attempt is made through charts to identify price movement patterns, which
predict future movement of the security.
 16

2.1.9 The Role of NEPSE Index in Making Investment Decision

Role of NEPSE are varied and highly important in the development of economy of a
country. They measure and control the growth of a country. Stock markets are the places,
where exactly investor do their business. The stock trading transactions are executed at the
stock exchanges through broker, unless a membership with that exchange, which enable to
trade directly. NEPSE apart from being hub of primary and secondary market. NEPSE affect
investment decision and price determination in the following ways:

Raising Capital for Businesses

Exchanges help companies to capitalize by selling shares to the investing public.

Mobilizing Savings for Investment

They help public to mobilize their savings to invest in high yielding economic sectors, which
results in higher yield, both to the individual and to the national economy.

Facilitating Company Growth

They help companies to expand and grow by acquisition or fusion.

Profit Sharing
They help both casual and professional stock investors, to get their share in the wealth of
profitable businesses.

Corporate Governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies
have better management records than privately held companies.

Creating Investment Opportunities for Small Investors

Small investors can also participate in the growth of large companies, by buying a small
number of shares.

Government Capital Raising for Development Projects

They help government to rise fund for developmental activities through the issue of bonds.
An investor who buys them will be lending money to the government, which is more secure,
and sometimes enjoys tax benefits.
 17

2.1.10 Meaning of Risk

Different people interpret uncertainty and risk in different ways. To some uncertainty is
simply lack of definite outcome, it is anything that could happen any unknown event which
may be favorable or unfavorable. Risk is a chance of happening some unfavorable event or
chance of losing some material value. The trouble arise form the fact that despite different
interpretations of uncertainty and risk, they are often used interchangeably.

Risk is defined in Webster's dictionary "as a hazard a peril: exposure to loss or injury" thus
for most, risk refers to chance that some unfavorable event will occur. If we engage in the
skydiving we are taking a chance with our life skydiving risky. If we bet the horses, we are
risking our money. If we invest in speculative stocks (or really any stock), we are taking a
risk in the hope of making an appreciable return (Brigham & Ehrhardt, 2011).

Most people view risk is the manner. It can be described a chance of loss. In reality, risk
occurs when we cannot be certain about the outcome of a particular activity or event. So,
we are not such that will occur in the future consequently, risk result from the fact that on
action scan as investing can produce, More than one outcome in future (Weston & Brigham,
1996).

In the basic sense, risk is the chance of financial loss. Having greater chance of loss is
viewed as more risky than those with lesser chance of loss. More formally, the term risk is
used interchangeably with uncertainty to refer to the variability of returns associated with a
given asset (Gitman, 2012).

2.1.11 Sources and Types of Risk

Interest Rate Risk
It is the potential variability or return caused by changes in the market interest rates. If
Market interest rate rise, then investment value and market price will fall and vice versa.
This interest rate risk affects the prices of bonds, stocks, real estate and other investment as
well.

The interest rate risk is the risk that an investment's value will change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield
curve, or in any other interest rate relationship. Such changes usually affect securities
 18

inversely and can be reduced by diversifying (investing in fixed-income securities with

different durations) or hedging (such as through an interest rate swap) (Investopedia, 2018).

Purchasing Power Risk

The risk caused due to the inflation is known as purchasing power Risk. Economists
measure the rate of inflation by using a price index. The consumer price index (CPI) is a
popular index. The percentage change in the CPI is a widely followed measure of the rate
of inflation.

Bull-Bear Market Risk

Bull-Bear market risk arises from the variability of market returns resulting from alternating
bull and bear market forces. When a security index rises fairly consistently form a low point
called a trough, for a period of time this upward trend is called a bull market. The bull market
ends when the market index reaches a peak and starts a downward trend. The period during
which the market declines to the next through is called a bear market.

Market risk is associated with consistent fluctuations seen in the trading price of any
particular shares or securities. That is, it arises due to rise or fall in the trading price of listed
shares or securities in the stock market.

Default Risk
Default risk is concerned with the security issuing firm's inability to meet its obligations.
Therefore it is closely related to the financial condition of the firm. In case of default,
investor is likely to lose some or all the initial investment made in the company.

Liquidity Risk
Liquidity risk is that portion of assets total variability of return which results from price
discounts given on sales commissions paid in order to sell the without delay, perfectly liquid
assets are highly marketable and suffer no liquidation costs. Liquid assets are not readily
marketable either price discounts must be given or these costs must be incurred by the seller.
In order to find a new investor for liquid assets, the more liquid assets are the larger the price
discounts/commissions which must be given up to the seller in order to affecting a quick
sale.
 19

Industry Risk
An industry is a group of companies that compete with each other to market homogeneous
product industry risk is that portion of an investment's total variability of return caused by
events that affect the products and firms that make up an industry.

Call-ability Risk
Some bonds and preferred stocks are issued with a provision that allows the issuer to call
them in for repurchase. Issuer like the call provision because it allows them to buy back
outstanding preferred stocks and or bonds with funds from a newer issue if market interest
rates drop below the level being paid on the outstanding securities.

Political Risk
It is the portion of an assets total variability of return caused by changes in the political
environment. Political risk arises from the exploitation of a politically weak group for the
benefit of a politically strong group with the efforts of various groups to improve their
relative position increasing the variability return from the affected assets. Regard less of
whether the changes that cause political or by economic interest, the resulting variability of
return is called political risk are sought by political or by economic interest, the resulting
variability of return is called political risk if it is accomplished through legislative, judicial
or administrative branches of government. Political risk can be classified as international
political risk and domestic political risk.

Types of Risk
There are two types of risk in securities market.
Systematic risk (Undiversifiable risk)
Unsystematic risk (Diversifiable risk)

Systematic Risk
Systemic risk varies substantially and encompasses a broad range of features. This means
that a financial instrument, institution, market, market infrastructure, or segment of the
financial system may be the source of systemic risk, the transmitter of it, as well as be
affected by it. It is not easy to determine whether the scale of an event is (will become)
systemic, since in turbulent periods, assessing the extent to which it affects other parts of
the system may be subject to dynamic changes and the assessment might be prone to an
 20

underestimation bias. Systemic risk can have its source in or outside the financial system or
it can result from the interconnectedness of particular financial institutions and financial
markets and their exposure to the real economy (Szpunar & Glogowski, 2012).

The systematic risk is market related. In other word, it arises from the changes in the
economy and market conditions for example high inflation, recession, impact of political
factors, which are beyond the control of company management. It affects all firms in the
market. The portion of the risk is non-diversifiable and con not be reduced. The systematic
risk is rewarded in the form of risk premium. Sometimes systematic risk is called market
risk. Systematic risk affects almost all assets in the economy, at least to some degree,
whereas systematic risk affects at most a small number of assets. The principle of
diversification has an important implication to a diversified investor, only systematic risk
matters. It follows that in deciding whether or not to buy a particular individual asset, a
diversified investor will only be concerned with that assets systematic risk. This is a key
observation and it allows us to say great deal about the risk and returns on individual assets.
In particular, it is the basis of famous relationship between risk and return called the security
market line. To develop the SML, we introduce the equally famous beta coefficient one of
the centerpiece of modern finance. Beta and SML are key concept of business it supplies us
with at least part of the answer to the questions of how to go about determining the required
return on an investment.

Unsystematic Risk
Unsystematic risk is due to the influence of internal factors prevailing within an
organization. Such factors are normally controllable from an organization's point of view. It
is a micro in nature as it affects only a particular organization. It can be planned, so that
necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk
(Akrani, 2012).

The unsystematic risk is non-market factors related. In other word, it arises from the project
specific factors for example inefficiency of management, failure in new production,
employer strikes, lawsuits and any other event that is unique to the company. It is inherent
to individual companies or projects. This portion of the risk is diversifiable and it is possible
to reduce or eliminate through diversification of investments. It is called unique or asset-
specific risk (Westorfield & Jordan, 1998).
 21

Reasons to Manage Risk

The term risk management can mean many things, but in business it involves identifying
events that could have adverse financial consequences and then taking actions to prevent or
minimize the damage caused by those events. Years ago corporate risk managers dealt
primarily with insurance that made sure the firm was adequately insured against fire theft
and other casualties and that it had adequate liabilities coverage. We know investor dislike
risk. We also know that most investor hold well diversified portfolio so at least in theory the
only relevant risk is systematic risk. Therefore if someone asks corporate executives what
types of risk they concerned about someone might expect the answer to be "beta". However
this is certainly not the answer you will get. The most likely answer is someone asked a
CEO to define risk is something like the possibility that our future earning and free cash
flows will be significant lower than we expected. There is no proof that risk management
adds values, here is several goods reasons for companies to manage risk.

Debt Capacity
Risk management can reduce the volatility of cash flows and this decrease the probability
of bankruptcy. Firm with lower operating risks can use more debt and this can lead to higher
stock prices due to the interest tax shield.

Maintaining the Optimal Capital Budget Overtime

Firms are reluctant to raise external equity due to the high flotation costs and market
pressure. This means that the capital budget must generally be financed with debt plus
internally generated funds, mainly retained earnings.

Financial Distress
Financial distress which can range from warring stockholders to higher interest rates on debt
to customer defection to bankruptcy is associated with having cash flows fall below
expected levels. Hence risk management can reduce the likelihood of low cash flows of
financial distress.

Comparative Advantages in Hedging

Many investors can't implement a homemade hedging program as efficiently as can a
company. Firms generally have lower transaction cost due to a large volume of hedging
activities. Managers of a company know more about the firm's risk exposure to those outside
 22

investors. Hence managers can create more effective hedging techniques because of
specialized skill and knowledge.

Borrowing Costs
Firms sometime reduce input costs specially the interest rate on debt through the use of
derivative instruments called swaps. Any such cost reduction adds value to the firm.

Tax Effects
Companies with volatile earnings pay more taxes than more stable companies due to the
treatment of tax credits and the rules governing corporate loss carry-forwards and carry
backs. Moreover, if volatile earnings lead to bankruptcy, than tax loss carry-forwards are
generally lost. Therefore our tax system encourages risk management to stabilize earnings.

2.1.12 Meaning of Return

Return is the total gain or loss experienced on investment at a given period of time. The
concept of return has different meaning to different investors. Some investors seek hear term
cash inflows and give loss value of more distant return such as investors might purchase the
other firm that pays large cash dividends. Other investors are concerned primarily with
growth. They would seek project that offer the promise of long term, higher than average
growth of sales, earnings and capital and appreciation (Quizlet, 2018).

The total gain or loss experienced on an investment over a given period of time; calculated
by dividing the asset’s cash distributions during the period, plus change in value, by its
beginning of period investment value (Gitman, 2009)

With most investments, an individual or business spends money today with the expectation
of earning even more money in the future. The concept of return provides investors with a
convenient way to express the financial performance of an investment (Brigham & Ehrhardt,
2011).

Multi Period Return and Annualized Return

A multi period return is the return earned during the multiple period of holding the securities.
To express the multiple period returns as annuals return, the returns are converted in an
annual basis. Such as annualized return is the mean return and are two types of mean return.
 23

Arithmetic Mean
This mean is the most familiar statistical measure to any investor or individual. It is a more
applicable measure of average performance over the period, when variability of return is
less. It is calculated by dividing the total return of multiple periods by the number of
observations or returns.

Geometric Mean
It is another method of calculating annualized. It is better measures of growth of wealth over
time that would give the same cumulative performance as the sequence of actual returns. It
measures more accurately the authentic average return. It is calculated by taking the nth root
of the product of one plus individual rate of returns minus one.

Annual Rate of Return

Annual return is the return an investment provides over a period of time, expressed as a
time-weighted annual percentage. Sources of returns can include dividends, returns of
capital and capital appreciation.

Expected Rate of Return

The return that an investor expects from his investment in the forthcoming future is called
expected rate of return. An investor normally estimates his expected rate of rerun by analysis
the trend of previous periods (years).

If an investment is to be made the expected rate of return of the expected holding period
return should be equal or greater than the required rate of return of that investment. The
expected rate of return for that investment, the expected rate of return is based upon the
expected cash receipts (eg. dividend or interest) over the holding period and the expected
ending or selling price. The expected rate of return is an ex-ante or unknown future return.
Unless the real rate of return is guaranteed, most investor recognized the possible rate of
return into a single number called the expected rate of return (VanHorne, 1997).

Investment decision is based on expectations about the future. The expected rate of return
for any assets is the weighted average rate of return. The expected rate calculated by
summing the products of the rates returns and their respective probabilities.
 24

Required Rate of Return

Required rate of return is the minimum return that an investor expects at least not to suffer
from loss. If an investor gets below the required rate he /she definitely suffer from loss.
While suffering from loss of return an investor must consider the real rate of return, expected
inflation and risk. Because consumption is forgone today, the investor is entitled to a rate of
return that compensates for this deferred consumption. Since the investor expected to
receive an increase in that real goods purchased Later and assuming for the moment zero
expected inflation and risk, the required rate could equal the real rate of return, in which
ease it world represent the pure time value of money (Cheney & Moses, 1992).

The required rate of return the faction or real rate of return and risk. It is the minimum rate
of return an investor will accept. The required rate of return for an assets or portfolio of
assets can be estimated using the equation for the SML suggested by the CAPM model.

2.1.13 Capital Assets Pricing Model (CAPM)

Capital assets are the long term financial as well as real assets and CAPM is bases on the
pricing of these assets. Modern portfolio theory of Markowitz suggests that the investment
decision should be based on the total risk and the price of assets should be based on the total
risk and the price of assets should also be determined on the basis of the total risk. But the
CAPM, which was developed by William F-Sharpe, John Linther and Treynor suggests that,
any investor can create a portfolio of assets that will eliminate virtually all diversifiable risk,
the only relevant risk is non-diversifiable risk and therefore the investment decision and the
pricing of capital assets should be based on the undiversifiable risk. This is the primary
importance of selecting that the price of capital assets should be determined in a way that
compensates the systematic risk (Bhattarai, 2004).
Assumptions of CAPM are as follows:
 All investors have same one period investment horizon.
 No taxes and no transaction cost for buying and selling securities exits.
 No inflation and no change in the level of interest rate exits.
 The capital market is in equilibrium.
 All investments are infinitely divisible, fractional shares may be purchased in any
portfolio or any individual assets.
 25

 All investor is Markowitz efficient diversifiers who delineate and seek to attain the
efficient frontier.
 An infinite amount of money can be borrowed or lent at the risk-free interest rate.
The CAPM reduces the situations to an extreme case. Everyone has the same information
and aggress about the future prospects from securities. This means that investors analyze
and process information in the same way. There are prefect markets for securities because
potential impediments such as finite divisibility, taxes, transition costs and different risk-
free borrowing and lending rates have been assumed away. This approach allows the focus
to shift from how an individual should invest to what would happen to security prices if
everyone invested in similar manner. By examining the collective behaviors in the market
places, the nature of the resulting equilibrium relationship between each securities risk and
return can be developed. The following features of CAPM are described as follows.

Capital Market Line (CML)

The CAPM assumes that investor can lender borrow at the same risk-free rate of interest. In
reality, such borrowing is likely to be either unavailable or restricted in amount. If there are
no opportunities to borrow or lend at the risk-free rate, the efficient set would be curve and
many combinations of risky securities would be efficient. All the investors face the same
efficient set. The different investor will choose different portfolios form the same efficient
set because they have different preference toward risk and return. This means that each
investor will spread his or her fund among risky securities in the same relative proportion
in order to achieve a personality performed overall combination of risk and return. This
feature of CAPM is often referred to as the separation theorem.

Separation Theorem
The optimal combination of risky assets for an investor can be determined without any
knowledge of the investor's preferences towards risk and return. In other words, the optional
combination of risky assets can be determined without any knowledge of shape of an
investor indifference curves.

Market Portfolio
The Market portfolio consisting of all the securities where the proportion invested in each
security corresponds to its relative market value. The relative Market value of a security is
 26

simply equal to the aggregate market value of the security divided by the sum of the
aggregate market values of all securities. It plays a central role in the CAPM because the
efficient set consists of an investment in the market portfolio, coupled with a desired amount
of either risk-free borrowing or lending.

Efficiency Set
In the CAPM it is simple to determine the relationship- between risk and expected return
for efficient portfolio. The figure clarifies more about it.

M CML
Risk premium

Risk Free return

Return

Risk 𝜎M 𝜎𝑝

Point M represents the market portfolio and 𝑅𝑓 represents the risk-free rate of return.
Efficient portfolio plots along the line starting at 𝑅𝑓 and going through M and consist of
alternative combinations of risk and return. The linear efficient set of CAPM is known as
capital market line (CML). All portfolios other than those using the market portfolio and
risk-free borrowing or lending lie between the CML. It has an interpret of 𝑅𝑓 and a slope
[ E ( Rm)  Rf ]
Therefore the equation for the capital market line may be expressed as
m
follows.
Symbolically,

E (Rp) = 𝑅𝑓 +  Rm  Rf σp

 m 
Where, Rf = Risk free return
Rm = Expected return on market
𝜎m = standard deviation on market portfolio
𝜎p = portfolio risk an efficient.
 27

For portfolio on the CML, to expected return is equal to the risk-free rate plus a return
proportional to the total risk of the portfolio. The slope of the CML is the same for all
portfolios one the CML and is the Market Price of risk.
[ E ( Rm )  R f ]
Slope of CML = 
m

2.1.14 Security Market Line (SML)

The capital market line (CML) is the relationship between total risk of portfolio 𝜎p and
expected portfolio return E(R 𝑝 ) which consists of the risk-free assists and the market
portfolio. However, the total risks of an individual asset should not be used to measure its
riskiness. Because some of the risk as reflected in total risk can be eliminated by
diversification. Therefore since its beta reflected risk after taking diversification benefits
into account, beta rather than 𝜎i is used to measure individual assets riskiness to investors.
The relationship between individual assets riskiness to investors. The relationship between
individual assets riskiness and their required return is set forth in the security market line
(SML). The line is drawn in expected return and beta space. It is linear and positively sloped.
Irrespective of whether investors can borrow or lead at a risk-free rate, all individual's
securities and portfolios are positioned on the security Market line. The relationship between
on assets return and its systematic risk can be expressed by SML. The equation for SML is
symbolically
E (Rj) = 𝑅𝑓 + [E(Rm) − Rf] Bj
Where (Rj) = Expected return for an asset
𝑅𝑓 = Risk free, rate (usually assumed to be a short-term T-bill rate) equals the expected
market return usually based on NEPSE index) and 𝛽𝑗 = denotes the assets data. It is measure
of sensitivity of a stock return to changes in the average markets returns.

M SML

Risk Premium
Return

Risk Free Return

Risk 𝛽 m=1
 28

Here SML starts from risk free assets (Rf) and moved ahead linearly with beta (  j) if the
securities beta is greater than 1. Then it implies that the securities returns fluctuate more
than the market returns. If beta is less than 1, the securities return is less sensitive to the
change in the market. The CAPM theory indicates that how much required rate of return of
individual securities for bearing the systematic risk.

2.1.15 Highlights About Selected Bank

Himalayan Bank Ltd. (HBL)
Himalayan Bank Ltd. was established in 1993 A.D. It is the fourth joint venture bank in
Nepal. In partnership with employees' provident fund and Habib Bank Ltd. one of the largest
commercial bank of Pakistan. HBL is the first joint venture bank managed by Nepalese
Chief Executive. Beside commercial banking services, the bank also offers industrial and
merchant banking services. Himalayan bank limited has always been committed to
providing a quality service to its customers with a personal touch. The bank has also planned
to adopt real banking technology and already offers unique service such as SMS banking,
internet banking and ATM service etc. Himalayan bank was listed NEPSE in 1993 A.D.

Everest Bank Ltd. (EBL)

Everest Bank Ltd. (EBL) started its operations in 1994 A.D. with a view and objective of
extending professionalized and efficient banking services to various segments of the society.
The bank is providing customer friendly services through its branch Network. All the
branches of the bank are connected through Anywhere Branch Banking System (ABBS).
EBL was one of the first bank to introduce ABBS in Nepal. It is joint venture partner which
hold 20 percent equity in the bank (Punjab National Bank). It was listed in NEPSE in 1996
A.D.

Machhapuchchhre Bank Ltd. (MBL)

Machhapuchchhre Bank Limited (MBL) was registered in 1998 as the first regional
commercial bank from the western region of Nepal and stared its banking operations from
Pokhara since year 2000. The bank facilitates its customer needs by delivering the best of
services in combination with the latest state of the art technologies and prudent international
practices. The bank is the pioneer in introducing the latest technology in the banking
industry in the country. It is the first bank to introduce centralized banking software,
 29

GLOBUS BANKING SYSTEM of Temenos, Switzerland. The bank provides modern

banking facilities such as Any Branch Banking System (ABBS), mobile banking, safe
deposit locker facilities, utility bills payment (telephone and mobile), ATM (VISA debit
cards) to its valued customers. Besides these, the bank is providing 365 days banking and
evening counter services to the customers through many of its offices. The bank has been
promoted by highly renowned non-residential Nepalese, prominent business man and
industrialists with a vision and dedication to provide the best financial products and services
in the most efficient and professional manner. Now with a paid up capital of over 8.05 billion
rupees, 62 branch offices, 4 extension counter, 14 branchless banking units and 86 ATMs
spread all across the country, it is one of the full-fledged national level commercial banks
operating in Nepal. It takes pride in having its own buildings for its head and corporate
office in Lazimpat, and branch offices in Naya Bazar Pokhara, Jomsom, Baglung and
Damauli.

Siddhartha Bank Ltd. (SBL)

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent
personalities of Nepal, today stands as one of the consistently growing bank in Nepal.
Siddhartha bank has been posting growth in its portfolio size and profitability
consistently since the beginning of its operations. Siddhartha bank has been able to gain
significant trust of the customers and all other stakeholders to become one of the most
promising commercial banks in the country in less than 15 years of its operation. The
bank is fully committed towards customer satisfaction. The range and scope of modern
banking products and services the bank has been providing is an example to its
commitment towards customer satisfaction. And the bank is confident and hopeful that
it will be able to retain this trust and move even further towards its mission of becoming
one of the leading banks of the industry. Siddhartha bank runs with a vision to be
financially sound, operationally efficient and keep abreast with technological
developments. The bank desires to be one of the leading banks of the industry by
fulfilling the interest of the stakeholders and also aims to provide total customer
satisfaction by way of offering innovative products and by developing and retaining
highly motivated and committed staff. It directs all its efforts to move ahead with
increased profits.
 30

2.2 Review of Related Studies

Different research works are carried out by different book and article. The study has also
used different database, websites and western regional library of Prithvi Narayan Campus,
Pokhara and other different kinds of sources. Those studies and issues are reviewed in this
section, which are related with risk and return analysis and investment analysis on share.

2.2.1 Review of Journal Articles

Paudel (2002) has studied on investing in share of commercial banks in Nepal. He had found
out that development of shares trading is not organized. The investors are not very conscious
about the risk and return characteristics of common stock in Nepal. They do not seem to be
reasonable for Nepalese share. The share with higher standard deviation however, produced
higher return the portion of unsystematic risk for that share is very large. Although they
have low systematic risk, they distribute high return to investors. The beta efficient of such
types of share was seemed to be negative. The risk per unit of return as measured by CV is
less than of market as a whole. It was found that most of the shares of Nepal are defensive
stocks having beta less than 1. Theoretically, the market price of over shares will fall in
order to increase the expected return or the market price underpriced shares will rise to
decrease expected return, so the equilibrium condition would have met.

Akhigbe and Whyte (2004) in their research paper focused on risk implementation of
banking and private sectors. The research paper has included many other studies, some of
the studies find that bank expansion into banking activities can affect the event that
permitted only limited entry by banks into non-banking activities. The study is conduct on
systematic, unsystematic, unsystematic and total risk such risk is calculated by using
statistical tools i.e. variance, standard deviation, t-statistical and signed rank which is used
by Aminud, Delong and Saunders (2002). The study has included 340 banks for the sample
size then they partition two sub samples: 46 large banks and 294 small banks. The major
finding of the study is that evidence of a significant decline is systematic risk for banks
securities firm and insurance companies but significant increase in total and unsystematic
risk for the banks and insurance company. This study has included five years period data.
The study also found that bank and insurance companies are less risky than securities
business. So, if security firms want to decline in risk. Security firm can be explained by their
ability to diversify into less risky banking and insurance activities. The research paper result
 31

suggests that regulators should carefully monitor and supervise banking activities in the new
era of financial modernization to mitigate adverse effects from the increase in risk.

Krishnaprabha and Vijayakumar (2015) in their research paper on a study on risk and return
analysis of selected stocks in India. They conclude risk and return analysis plays a key role
in most individual decision making process. Every investor wants to avoid risk and
maximize return. In general, risk and return go 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. Based on risk and return analysis, high risk gives high
returns with low risk gives to low return, based on this concept in banking and automobile
sector high risk gives low return, and in information technology, Fast moving consumer
goods, pharmaceutical sector low risk gives high return. Alpha stock is positive and the
companies are independent to market return and have profitable return.

2.2.2 Review of Thesis

Joshi (2004) has conducted a research on risk and return analysis of common stock of five
listed commercial banks. The main objective of the study was to assess the risk associated
with return on common stock investment on the basis of selected tools. For the study, the
researcher has used five years data 1998/19999 to 2002/03. For analysis, financial and
statistical tools are used. He has used arithmetic mean to calculate the return, standard
deviation and coefficient of variations, which are used to measure unsystematic risk and
beta coefficient. The measurement explains sensitivity or volatility of the stock with market
and individual banks. Correlation is a statistical tool that is used to measure relationship
between risk and return. The researcher has also used t-test to calculate hypothesis. The
major findings of his study are that Banking sector has the expected return of 21.77 percent,
risk of 36.10 percent, 36.10 percent and CV of 1.66, similarly finance and insurance sector
has 21.77 percent, 36.10 percent and 1.66, Hotel sector has 10.16 percent, 72.40 percent,
7.123, Trading sector has 6.86 percent, 80.68 percent, 11.76 other sectors have -16.61
percent, 50.45 percent, 3.037. Regarding the market, market expected return of 10.20
percent, risk of 39.57 percent and CV of 3.88 SCBL has the maximum market capitalization
and NBBL has the maximum market capitalization market capitalization as well as NEPSE
index has been heavily influenced by banking sectors. If investors wish to generate higher
return then they should bear high risk and invest in the share of SCBNL and if they are risk
 32

averters and they want to invest in single assets, they can invest in the shares of NIBL of
HBL because these two stocks have lower risk that portfolio risk

Kansakar (2004) has conducted a study on a study on risk and return analysis of common
stock investment. This study is based on primary data as well as secondary, from FY
1996/97 to 2001/02. Financial and statistical tools were used for the analysis of the data.
The main objectives of the study are to assess the risk associated with return on common
stock investment with special references to manufacturing companies in Nepal. The major
finding of the study is expected return on the common stock of Nepal Lever Limited had
the highest and lo west of Arun Vanaspati Ghee Udyog Ltd. With negative return. Risk is
measured in terms of standard deviation. From this point of view, Nepal lever Ltd. Is the
riskiest assets and Bottler Nepal Ltd. (Balaju) is the least risky assets. All stocks of
manufacturing companies are underpriced except the Arun Vanaspati Ghee Udhyog is
overpriced.

Lamichhane (2006) has conducted a research on risk and return of listed commercial banks
is Nepal. The main objective of the study was to analyze the risk and return analysis of listed
commercial banks in Nepal. For the study, the researcher has used 10 years of data from
1995 to 2005. She has used financial and statistical tools to calculate the return, standard
deviation, coefficient of variation and beta coefficient. The major findings of her study are
that the average rate of return of NABIL, HBL. NIB and EBL are 30.88 percent, 37.42
percent, 27.22 percent and 45.31 percent respectively. In the year 2000 all the sampled banks
have negative return or no return. Annual return of NABIL, HBL, NIB and EBL is -0.49, -
0.25, -0.14 &- 0.312 respectively and this year NEPSE movement is also negative i.e. -0.43.
In term of risk, common stock of EBL is most risky while HBL is least risky. If investor
wants to invest the share of banking sector he/she can purchase the share of HBL. Beta of
EBL is highest and beta of NIB is lowest. It shows that NIB is least risky and EBL is most
risky. From the study, it is concluded that none of the share prices are in equilibrium because
all the sampled bank's average rate of return is more than required rate of return.

Karki (2006) has conducted a study on risk and return analysis of listed companies. The
main objective of the study was to analyze the risk and return situation of the different listed
commercial banks & to analyze whether it is better to invest in portfolio or individual stock.
The study has covered five years of data from 1998/99 to 2002/003 of five commercial
 33

banks listed in NEPSE. The major finding of this study is that considering the trend of the
price movement of the shares of selected banks, it reveals the share price of almost all the
banks is decreasing but there is a sign of progress seen in the share price of listed companies.
When considering the return of SCBNL, it is 73.30 percent which is maximum but its risk
is 123.55 percent which is also maximum, but if risk taken into account for consideration
NIBL has the minimum risk. For the stock should be selected, the best way of analysis is
coefficient of variation (CV). As CV of SCBNL is 0.6855 the stock of SCBNL is the best
for investment.

Bijukchhe (2009) has conducted a study on risk and return analysis on common stock of
listed commercial banks. She has analyzed the systematic risk and return in the frame work
of CAPM model. For the study, the researcher has used 5 years data from 2002 to 2007. The
researcher has used financial and statistical tools to calculate the annual return, average rate
of return, standard deviation, coefficient of variation, beta coefficient and expected rate of
return. The major findings of her study are the average rate of return of NIBL, EBL, NABIL,
SCBNL and HBL are 26 percent, 57 percent 71 percent 45 percent and 25 percent
respectively. Among this sampled banks NABIL has the highest return and HBL has lowest
return. From the study in terms of risk or on the basis of coefficient of variation EBL is the
lower risk and NIBL is the highest risk among the all sampled banks.

Sharma (2012) has conducted a study on risk and return analysis of commercial bank in
Nepal. The main objective of the study was to analyze annual average rate of commercial
banks in Nepal. For the study, the researcher has used 10 years of data from 2000 to 2010.
She has used financial and statistical tools to calculate the return, standard deviation,
coefficient of variation and beta coefficient. The major findings of her study are that the
average rate of return of NABIL, HBL, NIB and EBL are 33 percent, 29.3 percent, 15.65
percent and 48.7 percent. As the result the Everest Bank has the highest return and NIB has
the lowest return. In the year 2004/05 NABIL. HBL & EBL are negative annual return but
NIB has positive return. Also in 2001/02 HBL, In 2002/03, 2003/04 and 2006/07 NIB has
negative return. The standard deviation of NABIL, HBL, NIB and EBL are 0.5534, 0.442,
0.388, 0.782 and beta coefficient of NABIL, HBL, NIB and EBL are 0.15, 0.3696, 0.195
and 0.0212 respectively.
 34

2.3 Research Gap

Previous studies are very old and not updated related to this topic. Previous studies offer
limited findings, more extensive testing and adjustment of necessary variables are needed
to be more conclusive about the risk and return analysis of commercial banks in Nepal. So,
in order to eliminate the above limitations, the study has been done on the topic in changing
scenarios, similarly the earlier studies will be updated and validated by addressing many
changes in Nepalese banking sector.
 35

CHAPTER- III
RESEARCH METHODOLOGY

This study attempts to have an insight into the risk and return analysis of selected
commercial banks. An attempt is made to apply a sound and systematic methodology
required to make this study meaningful.

This chapter is designed to throw light on the methodology used to undertake this study,
which aims at analyzing risk and return of selected commercial banks and drawing some
patient conclusion from this. For this purpose, research design, procedures of gathering data,
data collection, processing of data, procedure of analysis and indicators have been used.

3.1 Research Design

This study is based on descriptive and analytical research design. Descriptive research
design is used to describe the relationship between risk and return from table, trend lines
and figures with the help of presented data. Similarly as an analytical research design this
study uses standard deviation, coefficient of variation, beta coefficient, CAPM and average
rate of return of sampled banks.

3.2 Nature and Sources of Data

In this study secondary data sources has been used to present and analyze the data.
Information from secondary data sources such as report of Nepal Stock Exchange Ltd, report
of Security Board of Nepal, various website and annual reports of sampled commercial
banks are used.

3.3 Population and Sample

The total population of the study is NEPSE listed commercial banks in Nepal. There are
altogether 28 commercial banks in Nepal (NRB, 2018). Out of total, four banks have been
taken as sample to study the population. The sampled banks have been selected using
random sampling technique. The sampled commercial banks are Everest Bank Limited
 36

(EBL), Machhapuchchhre Bank Limited (MBL), Himalayan Bank Limited (HBL) and
Siddhartha Bank Limited (SBL).

3.4 Data Collection and Techniques

All the data required for study have been collected from secondary source. The annual report
of commercial banks have been taken from website. Similarly, NEPSE index have been
taken from websites and reports of NEPSE. Treasury bills return has been taken from
websites of Nepal Rastra Bank (NRB). Data were manually entered to spread sheet to work
out statistical and financial analysis ratios.

3.5 Data Analysis Tools

All the data has been presented and analyzed to fulfill the objectives of the study. To
illustrate the research work, various financial and statistical tools have been used which are
discussed in details as below:

3.5.1 Financial Tools

Capital Assets Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between
systematic risk and expected return for assets, particularly stocks. CAPM is widely used
tools for the pricing of risky securities, generating expected returns for assets given the risk
of those assets and calculating costs of capital.

The relationship between an asset return and its systematic risk can be expected by CAMP,
which is also, called the SML. SML is the line showing the relationship between systematic
risk index (beta) and required rate of return. The equation of the CAPM or Security Market
Line (SML) is:

̅ + [E(R
Required Rate of Return (R r ) = Rf ̅ ] × βj
̅ m ) − Rf
Where,
̅ = Average risk free rate of return
Rf
̅ m ) = Average expected rate of return on market
E (R
βj = Beta of stock j
 37

Risk Free Rate of Return

Treasury bills are the most common example of assets that offer a risk free rate of return.
Nepal Rastra Bank (NRB) issues the treasury bills in Nepal. Treasury bills are not listed in
Nepal Stock Exchange (NEPSE). The most common type of T-bills used in Nepal are 91
days, 182 days and 364 days T-bills. The minimum value of treasury bills in Nepal is
Rs.25,000. The risk free rate of return is assume to be treasury bills return and treasury bills
return is calculated as weighted average annualized T-bills return. T-bills return is derived
from under this formula.
̅ ) = ∑ Rf
Average Risk free rate of return (Rf
n

Where,
∑ Rf= Summation of treasury bills return
n = Number of observation

Annual Rate of Return on Stock

Annual return is the return an investment provides over a period of time, expressed as a
time-weighted annual percentage. Sources of returns can include dividends, returns of
capital and capital appreciation. The rate of annual return is measured against the initial
amount of the investment and represents a simple arithmetic mean.
Pt −Pt−1 +Div.t
Annual rate of return on stock, R j =
Pt−1

Where,
R j = Annual rate of return on stock j
Pt = Price of stock at time t
Pt−1 = Price of stock at time t-1
Div.t = Dividend on stock at time t

Risk Premium
A risk premium is the return in excess of the risk-free rate of return an investment is expected
to yield; an asset's risk premium is a form of compensation for investors who tolerate the
extra risk, compared to that of a risk-free asset, in a given investment. For example, high-
quality corporate bonds issued by established corporations earning large profits typically
have very little risk of default. The risk premium formula is:
 38

Risk Premium for a stock = R𝑗 – R𝑓

Where,
R j = Expected rate of return
R𝑓 = Risk free rate of return

Market Rate of Return

The market rate of return, here, is taken as the NEPSE return over the periods. NEPSE is
the only one organized stock market in Nepal. The return from NEPSE index represents
market return. Rate of return is in the market is computed considering changes in NEPSE
indices over the study periods as follows:
Nt − Nt−1
Market rate of return(R m ) =
Nt−1
∑ Rm
̅ m) =
Average Market Return(R
n
Where,
R m = Market rate of return
Nt = NEPSE index at time t
Nt−1 = NEPSE index at time t-1
n= Number of stock

Commercial Bank Return

The commercial bank’s return is defined as the increment in value of an investment, asset
or portfolio in relation to initial investment over a particular period. It is computed as:
Bt −Bt−1
Commercial bank return(R c ) =
Bt−1

∑ Rc
̅ c) =
Average commercial bank return(R
n
Where,
R c = Return of commercial bank return
Bt = Commercial bank index at time t
Bt−1 = Commercial bank index at time t-1
n= Number of stock
 39

3.5.2 Statistical Tools

Expected Rate of Return
The expected rate of return is the expected outcome increment in the value of initial
investment over the holding period. The expected rate of return based on the historical
data, so the average rate of return and expected rate of return is the same. The expected
rate of return can be computed using following formula:
∑ Rj
Average rate of return on stock E(𝑅̅𝑗 ) =
n

Where,
E(𝑅̅𝑗 )= Average rate of return or Expected rate of return on stock j
n= Number of stock

Standard Deviation
It is a quantitative measure of the total risk. It is the square root of the variance and measures
the total risk on common stock. In addition, it is a measures the dispersion of return around
the mean. The formula for calculating the standard deviation is:
̅ )2
∑(R− R
Standard Deviation ( 𝜎𝑗 ) = √
n−1

Where,
σ j = Standard deviation of return on stock j
R= Expected rate of return on stock
̅= Average mean return on stock
R
n = Number of observation

Coefficient of Variation
The coefficient of variation is the ratio of the standard deviation of a distribution to the mean
of that distribution. It is applicable to calculate the risk per unit of the expected return.
σj
CV =
Rj

Where,
j = Standard deviation of stock j

Rj = Average mean return of stock j

 40

Beta Coefficient
The beta coefficient is an index of systematic risk. Beta coefficient may be used for ranking
the systematic risk of different assets. If the beta is larger than 1 then the assets is more
volatile than market, which is called aggressive assets. If the beta is less than 1, the assets is
defensive assets, its price fluctuation is less volatile than the market. The formula of beta
coefficient is:
Cov(j.m)
j =
σ2m
Where,
j = Beta of stock j

 m2 = Variance of market
∑n ̅ ̅
j=1(Rj − Rj )((Rm −Rm )
Cov(j. m)=
n−1

Where,
Cov(j. m)= Covariance between stock j and market
R j = Expected rate of return on stock j
R m = Market return

R j = The average mean return on stock j

̅ m = Average mean return on market
R
n = Number of observation

Systematic Risk
Systematic risk is the risk inherent to the entire market or market segment. Systematic risk,
also known as undiversifiable risk or market risk that affects the overall market, not just a
particular stock or industry. This type of risk is unpredictable and impossible to completely
avoid. The formula of systematic risk is:
Systematic Risk = β 2j  σ 2m

Unsystematic Risk
It is known as diversifiable risk. It is non-market related risk. This type of risk can be largely
eliminated by holding a diversified portfolio of investments. It occurs due to internal factors
like strikes, management errors, poor marketing strategy etc.
Unsystematic Risk = Total risk- systematic risk
 41

Where,
Total risk = Var ()

Correlation Coefficient
It is the measure of relationship between two or more variables. Its value are limited between
the range of +1 and -1. Karl person's method is used to calculate correlation coefficient. A
positive correlation coefficient indicate that the return from two securities generally move
in the same direction and vice - versa. Correlation coefficient also help to test the
significance between the expected return. Microsoft Office Excel application has been used
to calculate between risk and return.

Cov(c,m)
Correlation Coefficient (rcm ) =
σ 𝑐 × σm

Significance test is necessary since, sometime interpretation of the result of the correlation
coefficient may be misleading. Significant test is done with the help of calculation of the
problems error.
2
1−𝑟𝑐𝑚
Probable Error(P. E. ) = 0.675
√𝑁

Where,
rcm = Correlation coefficient between the return of commercial banks and market
Cov(c, m)= Covariance of the returns of commercial banks and market
σ 𝑐 = Standard deviation of the returns of commercial banks
σm = Standard deviation of market returns
N= Number of sample

The probable error (P.E.) is the value, which is added or subtracted from the coefficient of
correlation (r) to get the upper limit and the lower limit respectively, within which the value
of the correlation expectedly lies.

There is no significant correlation between the variables if the value of ‘r’ is less than six
times of P.E. This shows that the coefficient of correlation is not at all significant.
If r<6P.E. = insignificant
 42

The correlation is said to be significant when the value of ‘r’ is six times more than the P.E.
This shows that the value of ‘r’ is significant.
If r>6P.E. = significant

By adding and subtracting the value of P.E from the value of ‘r’, we get the upper limit and
the lower limit respectively, within which the correlation of coefficient is expected to lie.
Symbolically, it can be expressed as:
𝜌(𝑟ℎ𝑜) = 𝑟 ± 𝑃. 𝐸(𝑟)

Stock Pricing
Stock pricing is refer to the required rate of return and expected rate of return analyzed the
over and under price of sampled commercial banks.

Expected return is simply an estimate of how an investment will perform in the future.
Investment analysts formulate expected returns by examining the historical performance of
the stock during different economic cycles, and arrive at an expectation based on the stock's
return during similar economic cycles.

The required rate of return, also known as the hurdle rate, is the minimum return an investor
will accept for an investment or project that compensates them for a given level of risk. In
equity valuation, it is equal to the weighted average cost of capital, and is used to value
stocks using discounted cash flow analysis.
The over and underprice of a stock is determine by using the given formula:
̅ j)
R r = E(R Equilibrium
̅ j)
R r > E(R Over price
̅ j)
R r < E(R Under price

Where,
R r = Required rate of return on stock
̅ j ) = Expected rate of return on stock
E(R
 43

CHAPTER IV
DATA PRESENTATION AND ANALYSIS

In this chapter, the researcher focuses on the data analysis and presentation of the sample
banks. It covers data of ten years period data from 2007/08 to 2016/17. This chapter takes
into consideration of historical return, average return, coefficient of variation, standard
deviation, risk premium, correlation coefficient and beta coefficient of sampled banks. The
data are presented and analyzed in different tables and figures to arrive at some concrete and
explicit findings and conclusion, which are obtained from various published and
unpublished financial statements, reports, bulletins, journal articles and so on. However,
conclusions have also been derived based on personal observation, informal interviews and
discussions with the concerned officials of the sampled bank.

4.1 Data Presentation and Analysis

4.1.1 Analysis of annual rate of return and average rate of return of sampled banks

Average rate of return can be defined as annualized average return that is derived by dividing
the sum of annual rate of return over investment horizon by number of investment years.
Annual rate of return is computed by dividing yearly regular income such as interest or
dividend and capital gain by initial investment

There are altogether 28 commercial banks in Nepal. Among them only four commercial
banks, HBL, MBL, EBL and SBL are taken as sample for the entire study. The study period
covers from F/Y 2007/08 to 2016/17 to analysis risk and return of commercial bank using
figures and tables. The average return and annual return are calculated based on historical
data of sampled bank.

4.1.1.1 Annual returns and average rate of returns of HBL: -

The annual return and average rate of returns of HBL has been presented in Table 4.1.
 44

Table 4.1
Annual Returns and Average Rate of Return of HBL

Year Closing price (Rs) Dividend (Rs) Annual rate of return (%)
𝐏𝐭 − 𝐏𝐭−𝟏 + 𝐃𝐢𝐯.𝐭
𝐑𝐣 = × 𝟏𝟎𝟎
𝐏𝐭−𝟏

2007/08 700 25.00 -

2008/09 941 27.10 38.00

2009/10 813 49.22 -10.72

2010/11 1500 33.16 90.56

2011/12 886 27.64 -38.72

2012/13 1980 70.00 126.60

2013/14 1760 65.56 -7.58

2014/15 816 48.68 -49.91

2015/16 575 53.68 -23.57

2016/17 653 26.56 22.90

Average 16.39

S.D. 497.26 17.00 59.68

Source: Annual Reports of HBL

Table 4.1 shows the annual rate of return, average rate of return and standard deviation of
HBL for 10 years period. The HBL has minimum and maximum stock price of Rs.575 and
Rs.1,980 respectively. Minimum and maximum dividend of HBL is Rs.25 in F/Y 2007/08
and Rs.70 in F/Y 2012/13 respectively. The standard deviation for the closing price and
dividend is Rs.497.26 and Rs.17.00 respectively. The standard deviation of return is 59.68
percent over the period. Hence, the most negative return is -49.91 percent in F/Y 2014/15
and maximum return is 126.60 percent in F/Y 2012/13. The average rate of return of HBL
is 16.39 percent over the period.
 45

2500
1980
2000 1760
1500 Closing
MPS RS.

1500 Price
941 886
1000 700 813 816
575 653
500

FISCAL YEAR

Figure 4.1. Trend line of closing price of HBL

Figure 4.1 shows the trend line of closing price of HBL for the ten years period. In the F/Y
2007/08, the closing price is Rs.700, which significantly rises up to Rs.1,980 in the F/Y
2012/13, and thereafter faces a negative trend and reaches up to Rs.653 in the F/Y 2016/17.
The trend line of closing price is highly fluctuating over the periods and declining in latest
fiscal years.

140.00
120.00
100.00
ANNUAL RETURN

80.00
Annual
60.00
return
40.00
20.00
0.00
-20.00
-40.00
-60.00
FISCAL YEAR

Figure 4.2. Trend line of annual return of HBL

Figure 4.2 illustrates the trend line of annual return of HBL. The annual rate of return is
fluctuated throughout the period. In the F/Y 2008/09, the annual rate of return was 38.00
 46

percent and in the F/Y 2011/12, it decreases significantly to -38.72 percent. The annual rate
of return rises up to 126.60 percent in the F/Y 2012/13 and gradually decreases and reaches
up to 22.90 percent in the F/Y 2016/17. The trend of annual rate of return is not uniform.

4.1.1.2 Annual returns and average rate of returns of EBL: -

The annual return and average rate of returns of EBL has been presented in Table 4.2.

Table 4.2
Annual Returns and Average Rate of Return of EBL
Year Closing price (Rs) Dividend (Rs) Annual rate of return (%)
𝐏𝐭 − 𝐏𝐭−𝟏 + 𝐃𝐢𝐯.𝐭
𝐑𝐣 = × 𝟏𝟎𝟎
𝐏𝐭−𝟏
2007/08 3132 50.00 -
2008/09 2455 60.00 -20.02
2009/10 1630 60.00 -31.16
2010/11 1094 60.00 -29.20
2011/12 1033 31.58 -0.09
2012/13 1591 60.00 57.07
2013/14 2631 62.00 69.14
2014/15 2120 35.00 -17.07
2015/16 3385 70.00 61.32
2016/17 1353 33.00 -57.96
Average 3.56
S.D. 835.33 13.95 46.85
Source: Annual Reports of EBL

Table 4.2 illustrates the annual rate of return, dividend, average rate of return and standard
deviation in F/Y 2007/08 to 2016/17. The maximum closing price and minimum closing
price of EBL is Rs.3,385 in F/Y 2015/16 and Rs.1,033 in F/Y 2011/12 respectively. The
maximum and minimum dividend of EBL is Rs.70 in F/Y 2015/16 and Rs.31.58 in F/Y
2011/12 respectively. The standard deviation of closing price is Rs.835.33. The average rate
of return of EBL is 3.56 percent and the standard deviation is 46.85 percent.
 47

4000
3385
3500 3132
3000 2631
2455
2500 2120
Closing
MPS RS.

2000 1630 1591 Price

1353
1500 1094 1033
1000
500
0

FISCAL YEAR

Figure 4.3. Trend line of closing price of EBL

Figure 4.3 shows the trend line of closing price of EBL for the ten years period. In the year
2007/08, the closing price is Rs.3,132, which gradually decrease to Rs.1,033 in the F/Y
2011/12. In F/Y 2015/16, the closing price reaches to the maximum level i.e. Rs.3,385 and
thereafter significantly decrease to Rs.1,353 in the F/Y 2016/17. The trend line of closing
price of EBL is fluctuating trend throughout the period.

80.00
60.00
40.00
ANNUAL RETURN

Annual
20.00 Return
0.00
-20.00
-40.00
-60.00
-80.00
FISCAL YEAR

Figure 4.4. Trend line of annual return of EBL

Figure 4.4 illustrates the trend line of annual return of EBL. The annual rate of returns is
fluctuated throughout the period. In the F/Y 2008/09, the annual rate of return was -20.02
 48

percent and gradually decreases trend to F/Y 2009/10 i.e.-31.16 percent, there after
increasing trend up to maximum level 69.14 percent in F/Y 2013/14. The EBL has faced
most negative return is -57.96 percent over the period.

4.1.1.3 Annual returns and average rate of returns of MBL: -

The annual return and average rate of return of MBL has been presented in Table 4.3.

Table 4.3
Annual Returns and Average Rate of Return of MBL
Year Closing price (Rs) Dividend (Rs) Annual rate of return (%)
𝐏𝐭 − 𝐏𝐭−𝟏 + 𝐃𝐢𝐯.𝐭
𝐑𝐣 = × 𝟏𝟎𝟎
𝐏𝐭−𝟏
2007/08 320 16.58 -
2008/09 620 0.00 98.93
2009/10 1285 22.10 107.26
2010/11 420 0.00 -65.60
2011/12 282 10.00 -32.86
2012/13 203 0.00 -24.47
2013/14 576 13.26 183.74
2014/15 564 17.68 0.22
2015/16 680 22.93 23.70
2016/17 360 21.00 -43.69
Average 27.47
S.D. 308.66 9.38 84.20
Source: Annual Reports of MBL

Table 4.3 represents the closing price, dividend, annual rate of return of the MBL where
standard deviation from the closing price is Rs.308.66, standard deviation from dividend is
Rs.9.38, and standard deviation from the annual rate of return is 84.20 percent. The average
rate of return of MBL is 27.47 percent over the period. The minimum and maximum closing
price of MBL is Rs.203 in F/Y 2012/13 and Rs.1285 in F/Y 2009/10 respectively. In the
study period, F/Y 2008/09, 2010/11, 2012/13 the MBL has not paid any dividend. The
maximum dividend is Rs.22.93 in F/Y 2015/16 throughout the period. The data shows the
bank has not stable dividend policy.
 49

1400 1285

1200
1000 Closing
Price
MPS RS.

800 680
620 576 564
600
420
320 360
400 282
203
200
0

FISCAL YEAR

Figure 4.5. Trend line of closing price of MBL

Figure 4.5 shows the trend line of closing price of MBL for the ten years period. In the F/Y
2007/08, the closing price is Rs.320, which is increases up to Rs.1,285 in F/Y 2009/10. In
the F/Y 2012/13, the closing price significantly decrease i.e. Rs.203 and thereafter-
fluctuated trend.

200.00

150.00
Annual
ANNUAL RETURN

100.00 return

50.00

0.00

-50.00

-100.00
FISCAL YEAR

Figure 4.6. Trend line of annual return of MBL

 50

Figure 4.6 illustrates the trend line of annual return of MBL. The annual rate of return is
fluctuated throughout the period. In the F/Y 2008/09, the annual rate of return was 98.93
percent and in the F/Y 2010/11, it decreases significantly to -65.60 percent. The annual rate
of return rises maximum level up to 183.74 percent in the F/Y 2013/14 and thereafter-
fluctuated trend line.

4.1.1.4 Annual returns and average rate of returns of SBL: -

The annual return and average rate of returns of SBL has been presented in Table 4.4.

Table 4.4
Annual Returns and Average Rate of Return of SBL
Year Closing price (Rs) Dividend (Rs) Annual rate of return (%)
𝐏𝐭 − 𝐏𝐭−𝟏 + 𝐃𝐢𝐯.𝐭
𝐑𝐣 = × 𝟏𝟎𝟎
𝐏𝐭−𝟏
2007/08 1090 16.58 -
2008/09 1000 16.58 -6.74
2009/10 444 20.06 -53.94
2010/11 270 28.58 -34.67
2011/12 345 16.84 38.36
2012/13 300 32.22 -8.16
2013/14 810 44.32 180.74
2014/15 678 22.10 -10.82
2015/16 869 48.75 31.43
2016/17 485 14.00 -38.58
Average 10.85
S.D. 301.05 12.27 70.62
Source: Annual Reports of SBL

Table 4.4 represents the closing price, dividend, standard deviation and annual return of
SBL. Standard deviation from closing price is Rs.301.05, average dividend from stock is
Rs.12.27 and average annual return of SBL is 10.85 percent. The standard deviation from
annual return of SBL is 70.62 percent over the period. Minimum and maximum stock price
is Rs.270 in F/Y 2010/11 and Rs.1090 in F/Y 2007/08 respectively. In addition, the
minimum and maximum of dividend of SBL is Rs.14.00 in F/Y 2016/17 and Rs.48.75 in
F/Y 2015/16 respectively. The most negative return of SBL is -53.94 percent in F/Y 2009/10
 51

and most positive return is 180.74 percent in F/Y 2013/14. The bank has not stable dividend
policy throughout the period.

1200 1090
1000
1000 869
810
800 678
MPS RS.

600 485
444
345 Closin
400 270 300 g Price
200

FISCAL YEAR

Figure 4.7. Trend line of closing price of SBL

Figure 4.7 shows the trend line of closing price of SBL for the ten years period. In F/Y
2007/08, the closing price is maximum level i.e. Rs.1,090, which is gradually decreases up
to Rs.270 in the F/Y 2010/11 and thereafter-increasing trend. In the F/Y 2013/14, the closing
price is Rs.810 and thereafter-fluctuated trend.

200.00

150.00
ANNUAL RETURN

Annual
100.00
return
50.00

0.00

-50.00

-100.00
FISCAL YEAR

Figure 4.8. Trend line of annual return of SBL

 52

Figure 4.8 presents the trend line of annual return of SBL. The annual return of SBL is
fluctuating trend line over the period. In addition, SBL has most negative return is -53.94
percent in F/Y 2009/10 and significantly increases up to 180.74 percent in F/Y 2013/14. In
F/Y 2011/12, 2013/14 and 2015/16 only shows the positive return over the sampled period.

4.1.2 Comparative analysis of return of sampled commercial banks: -

The comparative analysis of return of sampled commercial banks has been presented in
Table 4.5.

Table 4.5
Comparative Return Analysis of Sampled Commercial Banks
Bank HBL EBL MBL SBL
2007/08 - - - -
2008/09 38.00 -20.02 98.93 -6.74
2009/10 -10.72 -31.16 107.26 -53.94
2010/11 90.56 -29.20 -65.60 -34.67
2011/12 -38.72 -0.09 -32.86 38.36
2012/13 126.60 57.07 -24.47 -8.16
2013/14 -7.58 69.14 183.74 180.74
2014/15 -49.91 -17.07 0.22 -10.82
2015/16 -23.57 61.32 23.70 31.43
2016/17 22.90 -57.96 -43.69 -38.58
Average 16.39 3.56 27.47 10.85
S.D. 59.68 46.85 84.20 70.62

Table 4.5 reveals that MBL performs best and EBL performs worst in terms of annual rate
of return and average rate of return. There is also significant difference between the average
rate of return of HBL and SBL. HBL performs better than SBL. Standard deviation from
the annual rate of return of MBL is higher i.e. 84.20 percent than the other sampled bank.
The EBL has lowest standard deviation i.e. 46.85 percent over the sampled banks. The
standard deviation shows the riskiness of assets. In terms of standard deviation, the MBL is
more risky and EBL is less risky than other sampled banks. In addition, the standard
deviation of HBL and SBL is 59.68 percent and 70.62 percent respectively. In the
comparison between HBL and SBL, the SBL is more risky than HBL due to higher standard
deviation.
 53

EBL HBL MBL SBL

ANNUAL RETURTN 200
150
100
50
0
-50
-100
FISCAL YEAR

Figure 4.9. Trend line of annual return of sampled commercial banks

4.1.3 NEPSE index and market returns: -

NEPSE stands for Nepal Stock Exchange. The NEPSE index represents the organized stock
market of Nepal and it is used to calculate the market returns. The market return is obtained
by subtracting the current year NEPSE index from previous year and the subtracted value is
divided by previous year NEPSE Index. It can be further demonstrated by using Table 4.6.

Table 4.6
NEPSE Indexes and Market Returns
Year NEPSE index Market return (%)
2007/08 963.36 -
2008/09 749.10 -22.24
2009/10 477.73 -36.23
2010/11 362.85 -24.05
2011/12 389.74 7.41
2012/13 518.33 32.99
2013/14 1036.11 99.89
2014/15 961.23 -7.23
2015/16 1718.15 78.74
2016/17 1582.67 -7.89
Average 13.49
S.D. 477.44 47.68
Source: NEPSE Annual Reports
 54

Table 4.6 illustrates the NEPSE index and market returns for ten years period. The standard
deviation from NEPSE index and market return is Rs.477.44 and 47.68 percent respectively.
The average market return is 13.49 percent, most negative return is -36.23 percent in F/Y
2009/10 and highest positive return is 99.89 percent in F/Y 2013/14 over the sampled period.

2000
1718.15
1800
1582.67
1600
NEPSE PRICE RS.

1400
1200 1036.11
963.36 961.23
1000 NEPSE
749.1 Index
800
477.73 518.33
600 389.74
362.85
400
200
0

FISCAL YEAR

Figure 4.10. Trend line of NEPSE index

Figure 4.10 represents the price movement of NEPSE index for ten years period. The
NEPSE index is decreasing trend for first five years. In the F/Y 2012/13, the trend line
increase and reach to Rs.518.3 and thereafter it significantly rises up to Rs.1,718.15 in the
F/Y 2015/16. The overall price movement of NEPSE Index is fluctuated throughout the
period.

4.1.4 Commercial banks return: -

The commercial bank return is computed by subtracting the current year commercial bank
index from previous year and the subtracting value is divided by previous year commercial
bank index. It can be further demonstrated by using Table 4.7.
 55

Table 4.7
Returns of Commercial Banks
Year Commercial bank index Banks return (%)
2007/08 985.65 -
2008/09 780.87 -20.78
2009/10 456.93 -41.48
2010/11 328.70 -28.06
2011/12 358.57 9.09
2012/13 505.48 40.97
2013/14 945.00 86.95
2014/15 831.35 -12.03
2015/16 1573.71 89.30
2016/17 1481.81 -5.84
Average 13.12
S.D. 439.14 48.56
Source: NEPSE Annual Reports

Table 4.7 describes the commercial bank index and commercial banks return for ten years
period. In the F/Y 2007/08, the commercial bank index is Rs.985.65, the highest commercial
bank index is Rs.1,573.71 in the F/Y 2015/16, and lowest index is Rs.328.70 in F/Y 2010/11.
The average return of commercial bank is 13.12 percent over the period. The most negative
return of commercial bank return is -41.48 percent in F/Y 2009/10 and highest positive
return is 89.30 percent in F/Y 2015/16.

1800 1573.71
BANKS INDEX PRICE RS.

1600 1481.81
1400
1200 985.65
945
1000 780.87 831.35 Commercial
800 Bank Index
456.93 505.48
600
328.7 358.57
400
200
0

FISCAL YEAR

Figure 4.11. Trend line of commercial bank index

 56

Figure 4.11 shows the trend line of commercial bank index for the ten-year period. The
commercial bank index is fluctuating trend over the period. In F/Y 2007/08, the index is
Rs.985.65 and first five-year period the index is downward trend up to Rs.328.70 in F/Y
2010/11. Thereafter, significantly rises up to Rs.1,573.71 in F/Y 2015/16.

4.1.5 Treasury bills return analysis: -

The treasury bills return is calculated by using the annual average return from ten years data.
The calculated weighted average return of treasury bills is shown in Table 4.8.

Table 4.8
Returns of Treasury Bills

Year Treasury bills return (%)

2007/08 5.41
2008/09 6.71
2009/10 7.21
2010/11 8.56
2011/12 2.52
2012/13 2.96
2013/14 1.27
2014/15 1.49
2015/16 1.91
2016/17 2.76
Average 4.08
Source: NRB reports

Table 4.8 shows the annul treasury bills return for the ten years period. The treasury bills
return is fluctuated trend line over the period. The maximum treasury bills return in F/Y
2010/11 i.e. 8.56 percent and lowest treasury return in F/Y 2013/14 i.e. 1.27 percent. The
average rate of treasury bills return over the period is 4.08 percent. The rate of treasury bills
is assume to be risk free rate of return.
 57

4.1.6 Comparative risk and return analysis of sampled bank: -

In this research, the sampled commercial bank are compared with their risk and return. The
risk analysis based on standard deviation and beta coefficient and return analysis is based
on annual return and required rate of return of sampled banks.

Table 4.9
Comparative Risk and Return Analysis of Sampled Banks

Particulars HBL EBL MBL SBL

Variance 0.3562 0.2195 0.7089 0.4987

Standard Deviation 59.68% 46.85% 84.20% 70.62%

Beta Coefficient -0.1742 0.8822 0.6410 1.2402

Co-variance -0.0396 0.2005 0.1457 0.2819

Total Risk 0.3562 0.2195 0.7089 0.4987

Systematic Risk 0.0069 0.1769 0.093 0.3496

Unsystematic Risk 0.3493 0.0426 0.6159 0.1491

Coefficient of Variation 3.64 13.16 3.07 6.51

Average rate of return 16.39% 3.56% 27.47% 10.85%

Required rate of return 2.44% 12.38% 10.11% 15.75%

Risk Premium -1.64% 8.30% 6.03% 11.67%

Source: Appendix (II-V and VII)

Table 4.9 shows the comparative risk and return analysis of sampled bank. The highest
variance and standard deviation 0.7089, 84.20 percent and lowest is 0.2195, 46.85 percent
for the MBL and EBL respectively. The beta coefficient shows relatively high risk i.e.
1.2402 of SBL and low risk i.e. -0.1742 of HBL than others. Covariance of HBL bank
indicates inverse relation with market and SBL is significantly positive relation with market.
The systematic risk of SBL is higher and lowest one is HBL whereas unsystematic risk of
MBL is higher and lowest one is EBL. The highest coefficient of variation is 13.16 and
lowest is 3.07 of EBL and MBL respectively. The highest average rate of return of MBL is
27.47 percent and lowest is 3.56 percent of EBL. The highest risk premium is 11.67 percent
and lowest is -1.64 percent of SBL and HBL respectively.
 58

4.1.7 Compare the required rate of return and expected rate of return to analyze the
over and under price of commercial banks: -
The comparison between average rate of return and expected rate of return is done to find
out the stock price movement. If the average rate of return is higher than the required rate
of return, price is underpriced and vice versa. If average rate of return and expected rate of
return is same, the price will be equilibrium.

Table 4.10
Required Rate of Return and Expected Rate of Return Evaluation
Banks Average rate of Required rate of Price
return (%) return (%)
HBL 16.39% 2.44% Under price
EBL 3.56% 12.38% Over price
MBL 27.47% 10.11% Under price
SBL 10.85% 15.75% Over price
Source: Appendix (VII)

Table 4.10 describes the required rate of return and expected rate of return evaluation. The
price of HBL and MBL is underpriced due to higher average rate of return and price of EBL
and SBL is overpriced due to lower average rate of return rather than required rate of return.
The investors should buy or invest underpriced stock that is HBL and MBL and sell
overpriced stocks EBL and SBL.

4.1.8 Correlation between risk and expected rate of return: -

The correlation coefficient indicates the relationship between two or more variables. It
shows the significant and insignificant result between two or more variables. Theoretically,
when risk increases return also increases and vice versa. Correlation between risk and
expected return is presented in Table 4.11.

Table 4.11
Correlation Between Risk and Expected Rate of Return
Correlation(r) PE 6PE Result Remarks
-0.33 0.30 1.8 r<6PE insignificant

Source: Appendix VIII

 59

Table 4.11 shows the correlation between risk and expected rate of return of sampled banks.
A negative correlation occurs when the correlation coefficient (r) is less than 0 and indicates
that both variables move in the opposite direction. In short, any reading between 0 and -1
means that the two securities move in opposite directions. The correlation coefficient
between risk and return of sampled bank remained -0.33. There is weak degree of correlation
between risk and return of sampled banks.

The probable error of correlation coefficient helps in determining the accuracy and
reliability of the value of the coefficient that in so far depends on the random sampling.
When the correlation between risk and return is -0.33, the probable error (PE) is 0.30 and
6PE is 1.8. The correlation between risk and return is less than 6PE so the result is
insignificant. Insignificant result shows the no correlation between risk and return of
sampled banks.

4.2 Major findings of the study

The earlier chapter have discussed and explored the facts and matters required for the
various parts of the study. Analytical part, which is the heart of the study, makes an analysis
of various aspects of the commercial banks in Nepal by using some important financial as
well as statistical tools. Having completed the basic analysis required for the study, the final
and most important task of the researcher is to enlist findings issues and gap of the study
and give suggestions for further improvement. The main findings of the study are:
 The stock price and annual rate of return of HBL is fluctuating trend line over the
period. Standard deviation of stock and dividend is Rs.497.26 and Rs.17.00
respectively. The annual average rate of return and its standard deviation of HBL is
16.39 percent and 59.68 percent respectively.
 The stock price and annual rate of return of EBL is in decreasing trend up to F/Y
2011/12. After that, there is increasing trend line up to F/Y 2013/14 then, after
fluctuating trend. The standard deviation of price and dividend is Rs.835.33 and
Rs.13.95 respectively. The annual average rate of return of EBL and standard
deviation of return is 3.56 percent and 46.85 percent respectively.
 The stock price and annual rate of return of MBL is fluctuating trend line over the
period. The minimum stock price in F/Y 2012/13 is Rs.203 and maximum is
Rs.1,285 in F/Y 2009/10. The average rate of return of MBL is 27.47 percent and
 60

most negative return in F/Y 2010/11 i.e. -65.60 percent and highest return is
Rs.183.74 in F/Y 2013/14.
 The stock price and annual rate of return of SBL is fluctuating over the period. The
minimum and maximum stock price of SBL is Rs.270 in F/Y 2010/11 and Rs.1,090
in F/Y 2007/08 respectively. The average annual rate of return of SBL is 10.85
percent and standard deviation from return is 70.62 percent over the period. SBL has
most negative return is -53.94 percent in F/Y 2009/10 and highest positive return is
180.74 percent in F/Y 2013/14.
 The average market return is 13.49 percent, most negative return is -36.23 percent
in F/Y 2009/10 and highest positive return is 99.89 percent in F/Y 2013/14 over the
sampled period.
 The average commercial bank return is 13.12 percent over the period. The highest
commercial bank index is Rs.1,573.71 in the F/Y 2015/16, and lowest index is
Rs.328.70 in F/Y 2010/11. The most negative return of commercial bank return is -
41.48 percent in F/Y 2009/10 and highest positive return is 89.30 percent in F/Y
2015/16.
 The rate of treasury bills return over the period is 4.08 percent. The maximum
treasury bills return is 8.56 percent in F/Y 2010/11 and lowest treasury return is 1.27
percent in F/Y 2013/14.
 The beta coefficient of sampled commercial bank is -0.1742, 0.8822, 0.6410 and
1.2402 for HBL, EBL, MBL and SBL respectively. The beta coefficient shows
relatively high risk i.e. 1.2402 of SBL and low risk i.e. -0.1742 of HBL than others.
 The systematic risk of HBL, EBL, MBL and SBL are 0.0069, 0.1769, 0.093 and
0.3496 respectively. The unsystematic risk of HBL, EBL, MBL and SBL are 0.3493,
0.0426, 0.6159 and 0.1491 respectively.
 The total risk of HBL, EBL, MBL and SBL are 0.3562, 0.2195, 0.7089 and 0.4987
respectively. The return of the bearing of risk is 16.39 percent, 3.56 percent, 27.47
percent and 10.85 percent for HBL, EBL, MBL and SBL respectively.
 The correlation coefficient between risk and return of sampled bank is -0.33. There
is weak degree of correlation between risk and return of sampled banks.
 HBL and MBL is under price due to higher average rate of return i.e.16.39 percent
and 27.47 percent in respect to required rate of return i.e. 2.44 percent and 10.11
percent respectively.
 61

 EBL and SBL is over price due to lower average rate of return i.e. 3.56 percent and
10.85 percent in respect to required rate of return i.e. 12.38 percent and 15.75 percent
respectively.
 62

CHAPTER-V
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

A brief overlook of previous chapters and conclusions of the study are presented in this
chapter. At the end, some valuable suggestions and recommendations are put forwarded for
the benefit of sampled banks as well as concerned person and groups.

5.1 Summary
This study has been conducted with the objective of risk and return analysis of commercial
banks in Nepal. Financial tools and statistical tools have been used to make this study more
effective and informative. This study has covered ten years' data from F/Y 2007/08 to
2016/17. In this section, the researcher has summarized the overall study.

Banking sector is a dynamic part of economic which collect funds from surplus unit and
mobilize to deficit unit. The banks are known as the financial intermediaries. Bank is the
heart of trade commerce and industry. Capital market play vital role to develop the economic
world. There are two type of capital market, which are primary and secondary market. The
primary market is known as first time or new issue market. In the primary market, the
investor can buy securities directly from issuer. The secondary markets is that type of market
where, investor can buy or sell the securities freely. NEPSE is the only one secondary market
in Nepal. In Nepalese financial sector, NEPSE is the heart of capital market.

Risk and return are two sides of a coin. There is a general saying, “if there is no risk there
is no return.” Risk and return measure the performance of any organization. It is a key factor
of financial sectors. For any investment decision, the investors should calculate the rate of
return and their risk.

This study has analyzed risk and return of commercial banks in Nepalese market. Common
stock is the most risky security and lifeblood of security market. The main objectives of the
study is to analyze the risk and return of commercial banks. It is focused on common stocks
 63

of listed commercial bank. In this study HBL, EBL, MBL and SBL has been taken as sample
banks among 28 commercial banks in Nepal. The annual rate of returns of commercial banks
and their individual risk and return were calculated and analyzed as a whole to find out the
performance of each bank and the task of analyzing the risk and return reviews of related
banks has been done. Literature review and theoretical review of risk and return has been
described from different books and authors. Similarly, journal, articles and thesis have been
reviewed from different websites and libraries. The study has also included research
methodology to fulfillment of the objectives of research. The tools used to analyze the data
are standard deviation; beta coefficient, required rate of return, expected rate of returns;
correlation coefficient and coefficient of variation. This study is fully dependent upon the
secondary sources of data. The secondary data are collected from NEPSE, NRB, annual
reports of related commercial banks and related websites. The study has mainly focused on
risk and return of commercial banks. Based on presented data and analysis, some major
conclusion and recommendations are drawn.

5.2 Conclusions
The stock price and annual rate of return indicates the performance of related banks.
Hence, MBL performs best and EBL performs worst in terms of annual rate of return
and average rate of return. MBL has become able to pay good return than the other
sampled bank in overall sampled period. The EBL has not been able to pay adequate
return for their investor over the period. There is also significant difference between
the average rate of return of HBL and SBL. HBL performs better than SBL.
The market return is fluctuating over the period. The average market rate of return
is 13.49 percent; the overall market return has a symbolic return to investors. The
positive and two digit return is favor on investor’s point of view.
The average commercial bank return is near to market return. The commercial bank
return is two-digit return so the investor can easily invest to the commercial bank's
stock.
The treasury bills return fluctuating over the period. The treasury bills return
indicates the risk free rate of return. The treasury bills return help to take investment
decision. In this study the treasury bills return is adequate to invest on security
market
The beta coefficient shows relatively high risk and low risk of securities. Positive
and higher beta shows the high risk and vice versa. SBL is facing the high risk and
 64

HBL is facing low risk in terms of beta coefficient. MBL and EBL has moderate risk
with positive beta coefficient.
The systematic risk is known as the uncontrollable or non-diversifiable risk. The
systematic risk of SBL is higher and HBL is significantly lower than others have.
The higher systematic risk refers the unfavorable with market or vice versa. EBL
and MBL have moderate risk in terms of systematic risk. The unsystematic risk
refers controllable risk or management risk. The unsystematic risk of MBL is higher
and EBL has lower risk than others have. HBL and SBL have moderate level of
unsystematic risk.
The total risk is combination of systematic and unsystematic risk. The total risk of
MBL is significantly higher and EBL have lower than others. HBL and EBL have
moderate level of total risk. The return of MBL is higher and that of EBL is
significantly lower. In the comparison of market, return MBL and HBL have higher
return and SBL and EBL have lower return.
The correlation coefficient of risk and return of sampled banks has low degree of
negative correlation. Therefore, the risk and return of sampled banks are negatively
associated.
The stock of HBL and MBL is underpriced due to higher average rate of return in
comparison of required rate of return. The investors should buy HBL and MBL
stocks due to underpriced. EBL and SBL is overpriced due to lower average rate of
return in respect to required rate of return. The investors should sell the EBL and
SBL stocks as they are overpricing.
5.3 Recommendations
Some of the valuable suggestions and recommendations are drawn and put forwarded on
the basis of findings and conclusion.
The sampled banks are recommended to increase the annual rate of return and there
by the average, rate of return. For that, banks are advised to increase their dividend
through quality of lending, speedy recovery etc.
Beta concern with volatility relative to overall stock market. So the banks are
suggested to decrease their beta coefficient throughout the increase annual rate of
return and covariance with market return.
The bank should try to minimize unsystematic risks through proper internal
management and control.
 65

The banks are suggested to minimize the total risk and try to increase return through
the stable dividend policy and management control.
The sampled banks should apply proper dividend policy to increase the value of
stock. The banks are suggested to follow the market scenario and to take the decision
of dividend policy.
 66

BIBLIOGRAPHY

Books

Aminud B., Delong, S. & Saunders, M. N. (2002). Research methods for business students
(4thed.). Harlow: Pearson Education.

Bhattarai, P. (2004). The Nepalese financial system. Kathmandu: Asmita Books Publishers
and Distributors.

Brigham, E.F., & Ehrhardt, M.C. (2011). Financial management: Theory and practice
(13thed.). Boston: Cengage Learning Products.

Cheney, J.M., & Moses, E.A. (1992). Fundamentals of investment. New York: West
Publisher House.

Gitman, L. J. (2003). Principle of managerial finance (10thed.). New York: Harper Collins
Publication.

Gitman, L. J. (2009). Principle of managerial finance (12thed.). New York: Harper Collins
Publication.

Gitman, L. J. (2012). Principle of managerial finance (13thed.). New York: Harper Collins
Publication.

Radhaswamy, M., & Vasudevan, S.V. (1997). A text book of banking (2nd ed.). New Delhi:
Chand and Company Ltd.

Sharpe, W. (2002). Investment. New Delhi: Prentice Hall of India Limited.

VanHorne, James C. (1997). Financial market rates and flows (5thed.). New Delhi:
Prentice Hall.

Westerfied, R.W., & Jordan, B.D. (1998). Fundamentals of corporate finance. New York:
McGraw Hill/Irwin Companies.

Weston, J.F., & Brigham, E.F. (1996). Essentials of managerial finance (11thed.). New
York: Dryden Press.

Journals

Akhigbe, A., & Whyte, A. M. (2004). The Gramm-Leach-Bliley Act of 1999: Risk
implications for the financial services industry. Journal of Financial Research,
27(3), 435–446.
 67

Akrani, G. (2012). Types of risk systematic and unsystematic risk in finance. Label:
Finance, Comments, 2(3), 1-7.

Krishnaprabha, S., & Vijayakumar, M. (2015). A study on risk and return analysis of
selected stocks in India. International Journal of Scientific Research and
Management, 3(4), 2550-2554.

Poudel, N.P. (2002). In Nepal investing in shares of commercial bank. An assessment of

risk and return elements. Economic Review of NRB, 14, 1608-6627.

Szpunar, P. J., & Glogowski, A. (2012). Lending in foreign currencies as a systemic risk.
Macro-prudential Commentaries Issue, (4), 5.

Vaidya, D. (2015). Bond market in Nepal. SEBON Journal, 5, 118-125.

Thesis

Bijukchhe, R. (2009). Risk and return analysis on common stock of listed commercial
banks (Unpublished master’s thesis). Prithvi Narayan Campus, Pokhara, Tribhuvan
University.

Joshi, D. R. (2004). Risk and return analysis of common stock of five listed commercial
banks (Unpublished master’s thesis). Central Department of Management,
Tribhuvan University Kathmandu.

Kansakar, S. B. S. (2004). Risk and return analysis of common stock investment

(Unpublished master’s thesis). Central Department of Management, Tribhuvan
University Kathmandu.

Karki, D. B. (2006). Risk and return analysis of listed companies (Unpublished master’s
thesis). Central Department of Management, Tribhuvan University Kathmandu.

Lamichhane, B. L. (2006). Risk and return of listed commercial banks is Nepal

(Unpublished master’s thesis). Prithvi Narayan Campus, Pokhara, Tribhuvan
University.

Sharma, R. (2012). Risk and return analysis of commercial bank in Nepal (Unpublished
master’s thesis). Prithvi Narayan Campus, Pokhara, Tribhuvan University.

Acts, Rules, Regulations and Directives

Article 2 (A), Commercial Bank Act (2031)

Article 2 (B), Bank and Financial Institutions Act, (2074)

 68

Reports and Publications

Everest Bank Limited (2008) Annual Report from FY 2007/08. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/14thannual%20report.pdf

Everest Bank Limited (2009) Annual Report from FY 2008/09. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/091111025232_15th%20AGM.p
df

Everest Bank Limited (2010) Annual Report from FY 2009/10. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/101103054347_EBL%20AR%2
0067%20New.pdf

Everest Bank Limited (2011) Annual Report from FY 2010/11. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/EBL%20AR%20Eng%20068%2
0for%20Net.pdf

Everest Bank Limited (2012) Annual Report from FY 2011/12. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/EBL%20AR%20069%20(Eng)
%20for%20Web.pdf

Everest Bank Limited (2013) Annual Report from FY 2012/13. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/140204020459_EBL%20Eng.%
20AR%20070%20for%20web.pdf

Everest Bank Limited (2014) Annual Report from FY 2013/14. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/EBL_AR_071_for_Web.pdf

Everest Bank Limited (2015) Annual Report from FY 2014/15. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/21th_Annual_Report_20132014
_English.pdf

Everest Bank Limited (2016) Annual Report from FY 2015/16. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/22nd_Annual_Report_2015_201
6_English.pdf

Everest Bank Limited (2017) Annual Report from FY 2016/17. Retrieved from
http://www.everestbankltd.com/uploads/annualreport/EBL_NFRS_Financial_Stateme
nt.pdf

Himalayan Bank Limited (2008) Annual Reports from FY 2007/08. Retrieved from
https://himalayanbank.com/uploads/publication/16th_annual_report.pdf

Himalayan Bank Limited (2009) Annual Reports from FY 2008/09. Retrieved from
https://himalayanbank.com/uploads/publication/17th_annual_report.pdf
 69

Himalayan Bank Limited (2010) Annual Reports from FY 2009/10. Retrieved from
https://himalayanbank.com/uploads/publication/18th_annual_report.pdf

Himalayan Bank Limited (2011) Annual Reports from FY 2010/11. Retrieved from
https://himalayanbank.com/uploads/publication/19th_annual_report.pdf

Himalayan Bank Limited (2012) Annual Reports from FY 2011/12. Retrieved from
https://himalayanbank.com/uploads/publication/20th_annual_report.pdf

Himalayan Bank Limited (2013) Annual Reports from FY 2012/13. Retrieved from
https://himalayanbank.com/uploads/publication/21th_annual_report.pdf

Himalayan Bank Limited (2014) Annual Reports from FY 2013/14. Retrieved from
https://himalayanbank.com/uploads/publication/22th_annual_report.pdf

Himalayan Bank Limited (2015) Annual Reports from FY 2014/15. Retrieved from
https://himalayanbank.com/uploads/publication/23th_annual_report.pdf

Himalayan Bank Limited (2016) Annual Reports from FY 2015/16. Retrieved from
https://himalayanbank.com/uploads/publication/24th_annual_report.pdf

Himalayan Bank Limited (2017) Annual Reports from FY 2016/17. Retrieved from
https://himalayanbank.com/uploads/publication/25th_annual_report.pdf

Machhapuchchhre Bank Limited (2008) Annual Report from FY 2007/08. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2009) Annual Report from FY 2008/09. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2010) Annual Report from FY 2009/10. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2011) Annual Report from FY 2010/11. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2012) Annual Report from FY 2011/12. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2013) Annual Report from FY 2012/13. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2014) Annual Report from FY 2013/14. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2015) Annual Report from FY 2014/15. Retrieved from
https://www.machbank.com/financial-reports
 70

Machhapuchchhre Bank Limited (2016) Annual Report from FY 2015/16. Retrieved from
https://www.machbank.com/financial-reports

Machhapuchchhre Bank Limited (2017) Annual Report from FY 2016/17. Retrieved from
https://www.machbank.com/financial-reports

Siddhartha Bank Limited (2008) Annual Report from FY 2007/08. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/areport0708_64_65_en_2
0110905042147.pdf

Siddhartha Bank Limited (2009) Annual Report from FY 2008/09. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/areport0809_65_66_en_2
0110905041921.pdf

Siddhartha Bank Limited (2010) Annual Report from FY 2009/10. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/Final_Annual_Report_206
7_20120312124726.pdf

Siddhartha Bank Limited (2011) Annual Report from FY 2010/11. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/SBL_Annual%20Report_
2011_20120727014509.pdf

Siddhartha Bank Limited (2012) Annual Report from FY 2011/12. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/Final%20Annual%20Rep
ort%20for%202068_069_20121227022915.pdf

Siddhartha Bank Limited (2013) Annual Report from FY 2012/13. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/SBL%20Annual%20repor
t%20%20English_20140523121758.pdf

Siddhartha Bank Limited (2014) Annual Report from FY 2013/14. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/English%20Annual%20R
eport%20FY%202013-14_20150612032443.pdf

Siddhartha Bank Limited (2015) Annual Report from FY 2014/15. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/Annual%20Report%2020
14%2015_20160313054123.pdf

Siddhartha Bank Limited (2016) Annual Report from FY 2015/16. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/Annual%20Report%20FY
%20201516_20170412042607.pdf

Siddhartha Bank Limited (2017) Annual Report from FY 2016/17. Retrieved from
https://www.siddharthabank.com:444/uploads/financial/file/Annual%20Report%20for
%20website_HQ_SBL_20180305092655.pdf
 71

Websites

Business. (2017, November 17). Definition of bank. Retrieved from

https://buissnes2017.wordpress.com/bank/

ICRA Nepal. (2012, October 3). ICRA Nepal introduction. Retrieved from
https://icranepal.com/

Investopedia. (2013, October 15). The role of commercial banks. Retrieved from
https://www.investopedia.com/terms/c/commercialbank.asp

Merriam-Webster. (2018, July 13). Meaning of risk. Retrieved from https://www.merriam-

webster.com/dictionary/risk

Nepal Stock Exchange. (2018, March 16). Introduction. Retrieved from

www.nepalstock.com

Quizlet. (2018, February 7). Risk and return. Retrieved from

https://quizlet.com/5615128/finance-ch-5-risk-and-return-flash-cards/

The Kathmandu Post. (2018, February 9). C-ASBA process to launch. Retrieved from
http://kathmandupost.ekantipur.com/news/2018-02-09/c-asba-process-to-launch-
feb-23.html

Wikipedia. (2009, August 17). The ASBA process. Retrieved from

https://en.wikipedia.org/wiki/ASBA

Wikipedia. (2016, May). History of bank. Retrieved from

https://en.wikipedia.org/wiki/Bank

Wikipedia. (2017, September 15). The Nepal stock exchange limited. Retrieved from
https://en.wikipedia.org/wiki/Nepal_Stock_Exchange#History
 72

Appendix I
Commercial Bank Operating in Nepal

S.N. Name of Bank Operating (AD) Head Office

1 Nepal Bank Ltd. 1937/11/15 Dharmapath, Kathmandu
2 Rastriya Banijya Bank Ltd. 1966/01/23 Singhadurbar Plaza, Kathmandu
3 Agricultural Development Bank Ltd.** 1968/01/21 Ramshahpath, Kathmandu
4 Nabil Bank Ltd. 1984/07/12 Beena Marg, Kathmandu
5 Nepal Investment Bank Ltd. 1986/03/09 Durbarmarg, Kathmandu
6 Standard Chartered Bank Nepal Ltd. 1987/02/28 Nayabaneshwor, Kathmandu
7 Himalayan Bank Ltd. 1993/01/18 Kamaladi, Kathmandu
8 Nepal SBI Bank Ltd. 1993/07/07 Kesharmahal, Kathmandu
9 Nepal Bangladesh Bank Ltd. 1994/06/06 Kamaladi, Kathmandu
10 Everest Bank Ltd. 1994/10/18 Lazimpat , Kathmandu
11 Kumari Bank Ltd. 2001/04/03 Durbarmarg, Kathmandu
12 Laxmi Bank Ltd. 2002/04/03 Hattisar, Kathmandu
13 Citizens Bank International Ltd. 2007/04/20 Kamaladi, Kathmandu
14 Prime Commercial Bank Ltd. 2007/09/24 Newroad, Kathmandu
15 Sunrise Bank Ltd. 2007/10/12 Gairidhara, Kathmandu
16 Mega Bank Nepal Ltd. 2010/07/23 Kantipath, Kathmandu
17 Century Commercial Bank Ltd. 2011/03/10 Putalisadak , Kathmandu
18 Sanima Bank Ltd. 2012/02/15 Nagpokhari, Kathmandu
19 Machhapuchhre Bank Ltd. 2012/07/09* New Road, Pokhara, Kaski
20 NIC Asia Bank Ltd. 2013/06/30* Thapathali, Kathmandu
21 Global IME Bank Ltd. 2014/04/09* Panipokhari, Kathmandu
22 NMB Bank Ltd. 2015/10/18* Babarmahal, Kathmandu
23 Prabhu Bank Ltd. 2016/02/12* Babarmahal, Kathmandu
24 Siddhartha Bank Ltd. 2016/07/21* Hattisar, Kathmandu
25 Bank of Kathmandu Lumbini Ltd. 2016/07/14* Kamaladi, Kathmandu
26 Civil Bank Ltd. 2016/10/17* Kamaladi, Kathmandu
27 Nepal Credit and Commerce Bank Ltd. 2017/01/01* Bagbazaar, Kathmandu
28 Janata Bank Nepal Ltd. 2017/04/07* Thapathali, Kathmandu
*Joint operation date after merger and/or acquisition.
** Started to operate as 'A' class Bank (from 2006/03) under BAFIA, 2006
Source: NRB reports
 73

Appendix II
Calculation of Variance, Standard Deviation, Coefficient of Variation, Systematic
and Unsystematic Risk and Beta Coefficient of the return of HBL.

Year 𝑅𝑗 (𝑅𝑗 - R j ) (𝑅𝑗 - R j ) 2 (𝑅𝑗 - R j ) ( RM  RM ) ( RM  RM ) ( RM  RM ) 2

2007/008
2008/009 0.3800 0.2161 0.0467 -0.0772 -0.3573 0.1277
2009/010 -0.1072 -0.2711 0.0735 0.1348 -0.4972 0.2472
2010/011 0.9056 0.7417 0.5501 -0.2784 -0.3754 0.1409
2011/012 -0.3872 -0.5511 0.3037 0.0335 -0.0608 0.0037
2012/013 1.2660 1.1021 1.2146 0.2149 0.1950 0.0380
2013/014 -0.0758 -0.2397 0.0575 -0.2071 0.8640 0.7465
2014/015 -0.4991 -0.6630 0.4396 0.1374 -0.2072 0.0429
2015/016 -0.2357 -0.3996 0.1597 -0.2607 0.6525 0.4258
2016/017 0.2290 0.0651 0.0042 -0.0139 -0.2138 0.0457
Total 1.4755 0.0005 2.8496 -0.3168 -0.0002 1.8184
Source: Calculated on basic data extracted from NEPSE and annual report of Bank

∑𝑛 ̅ 2
𝑗=1(𝑅𝑗 −𝑅𝑗 ) 2.8496
𝟐
a. Variance(𝝈 ) : = = 0.3562
𝑛−1 9−1
∑ 𝑅𝑗 1.4755
b. Average rate of return = = = 0.1639 = 16.39%
𝑛 9

c. Standard deviation (𝝈) = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = √0.3562 = 0.5968 = 59.68%

d. Total risk (𝟐 ) = 0.3562
e. Systematic risk = 𝛽𝑗 2 × 𝜎𝑚 2 = −0.17422 × 0.2273 = 0.0069
f. Unsystematic = 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 – 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘
= 0.3562 -0.0069 = 0.3493
∑𝑛 ̅ ̅
𝑗=1(𝑅𝑗 −𝑅𝑗 )(𝑅𝑚 −𝑅𝑚 ) −0.3168
g. 𝐂𝐨𝐯𝐚𝐫𝐢𝐚𝐧𝐜𝐞 (R j × R m )= = = −0.0396
𝑛−1 9−1
𝐶𝑜𝑣(𝑅𝑗 ×𝑅𝑚 ) −0.0396
h. Beta Coefficient(𝜷𝒋 ) = = = -0.1742
𝜎𝑚 2 0.2273
𝜎𝑗 0.5968
i. 𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐭𝐢𝐨𝐧 = = = 3.64
𝑅̅𝑗 0.1639
 74

Appendix III
Calculation of Variance, Standard Deviation, Coefficient of Variation, Systematic
and Unsystematic Risk and Beta Coefficient of the return of EBL.

Year 𝑅𝑗 (𝑅𝑗 - R j ) (𝑅𝑗 - R j ) 2 (𝑅𝑗 - R j ) ( RM  RM ) ( RM  RM ) ( RM  RM ) 2

2007/008
2008/009 -0.2002 -0.2358 0.0556 0.0843 -0.3573 0.1277
2009/010 -0.3116 -0.3472 0.1205 0.1726 -0.4972 0.2472
2010/011 -0.2920 -0.3276 0.1073 0.1230 -0.3754 0.1409
2011/012 -0.0009 -0.0365 0.0013 0.0022 -0.0608 0.0037
2012/013 0.5707 0.5351 0.2863 0.1043 0.195 0.038
2013/014 0.6914 0.6558 0.4301 0.5666 0.864 0.7465
2014/015 -0.1707 -0.2063 0.0426 0.0427 -0.2072 0.0429
2015/016 0.6132 0.5776 0.3336 0.3769 0.6525 0.4258
2016/017 -0.5796 -0.6152 0.3785 0.1315 -0.2138 0.0457
Total 0.3203 -0.0001 1.7559 1.6042 -0.0002 1.8184
Source: Calculated on basic data extracted from NEPSE and annual report of Bank

∑𝑛 ̅ 2
𝑗=1(𝑅𝑗 −𝑅𝑗 ) 1.7559
a. Variance(𝝈𝟐 ) : = = 0.2195
𝑛−1 9−1
∑ 𝑅𝑗 0.3203
b. Average rate of return = = = 0.0356 = 3.56%
𝑛 9

c. Standard deviation (𝝈) = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = √0.2195 = 0.4685 = 46.85%

d. Total risk (2 )= 0.2195
e. Systematic risk = 𝛽𝑗 2 × 𝜎𝑚 2 = 0.88222 × 0.2273 = 0.1769
f. Unsystematic = 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 – 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘
= 0.2195 -0.1769 = 0.0426
∑𝑛 ̅ ̅
𝑗=1(𝑅𝑗 −𝑅𝑗 )(𝑅𝑚 −𝑅𝑚 ) 1.6042
g. 𝐂𝐨𝐯𝐚𝐫𝐢𝐚𝐧𝐜𝐞(𝑹𝒋 × 𝑹𝒎 ) = = = 0.2005
𝑛−1 9−1
𝐶𝑜𝑣(𝑅𝑗 ×𝑅𝑚 ) 0.2005
h. Beta Coefficient(𝜷𝒋 ) = = = 0.8822
𝜎𝑚 2 0.2273
𝜎 0.4685
i. 𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐭𝐢𝐨𝐧 = 𝑅̅𝑗 = 0.0356 = 13.16
𝑗
 75

Appendix IV
Calculation of Variance, Standard Deviation, Coefficient of Variation, Systematic
and Unsystematic Risk and Beta Coefficient of the return of MBL.

Year 𝑅𝑗 (𝑅𝑗 - R j ) (𝑅𝑗 - R j ) 2 (𝑅𝑗 - R j ) ( RM  RM ) ( RM  RM ) ( RM  RM ) 2

2007/008
2008/009 0.9893 0.7146 0.5107 -0.2553 -0.3573 0.1277
2009/010 1.0726 0.7979 0.6366 -0.3967 -0.4972 0.2472
2010/011 -0.656 -0.9307 0.8662 0.3494 -0.3754 0.1409
2011/012 -0.3286 -0.6033 0.3640 0.0367 -0.0608 0.0037
2012/013 -0.2447 -0.5194 0.2698 -0.1013 0.1950 0.0380
2013/014 1.8374 1.5627 2.4420 1.3502 0.8640 0.7465
2014/015 0.0022 -0.2725 0.0743 0.0565 -0.2072 0.0429
2015/016 0.237 -0.0377 0.0014 -0.0246 0.6525 0.4258
2016/017 -0.4369 -0.7116 0.5064 0.1521 -0.2138 0.0457
Total 2.4725 0.0000 5.6713 1.1669 -0.0002 1.8184
Source: Calculated on basic data extracted from NEPSE and annual report of Bank

∑𝑛 ̅ 2
𝑗=1(𝑅𝑗 −𝑅𝑗 ) 5.6713
a. Variance(𝝈𝟐 ) : = = 0.7089
𝑛−1 9−1
∑ 𝑅𝑗 2.4725
b. Average rate of return = = = 0.2747 = 27.47%
𝑛 9

c. Standard deviation (𝝈) = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = √0.7089 = 0.8420 = 84.20%

d. Total risk (2 )= 0.7089
e. Systematic risk = 𝛽𝑗 2 × 𝜎𝑚 2 = 0.64102 × 0.2273 = 0.093
f. Unsystematic = 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 – 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘
= 0.7089 -0.093 = 0.6159
∑𝑛 ̅ ̅
𝑗=1(𝑅𝑗 −𝑅𝑗 )(𝑅𝑚 −𝑅𝑚 ) 1.1669
g. 𝐂𝐨𝐯𝐚𝐫𝐢𝐚𝐧𝐜𝐞(𝑹𝒋 × 𝑹𝒎 ) = = = 0.1457
𝑛−1 9−1
𝐶𝑜𝑣(𝑅𝑗 ×𝑅𝑚 ) 0.1457
h. Beta Coefficient(𝜷𝒋 ) = = = 0.6410
𝜎𝑚 2 0.2273
𝜎 0.8420
i. 𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐭𝐢𝐨𝐧 = 𝑅̅𝑗 = 0.2747 = 3.07
𝑗
 76

Appendix V
Calculation of Variance, Standard Deviation, Coefficient of Variation, Systematic
and Unsystematic Risk and Beta Coefficient of the return of SBL.

Year 𝑅𝑗 (𝑅𝑗 - R j ) (𝑅𝑗 - R j ) 2 (𝑅𝑗 - R j ) ( RM  RM ) ( RM  RM ) ( RM  RM ) 2

2007/008
2008/009 -0.0674 -0.1759 0.0309 0.0628 -0.3573 0.1277
2009/010 -0.5394 -0.6479 0.4198 0.3221 -0.4972 0.2472
2010/011 -0.3467 -0.4552 0.2072 0.1709 -0.3754 0.1409
2011/012 0.3836 0.2751 0.0757 -0.0167 -0.0608 0.0037
2012/013 -0.0816 -0.1901 0.0361 -0.0371 0.1950 0.0380
2013/014 1.8074 1.6989 2.8863 1.4678 0.8640 0.7465
2014/015 -0.1082 -0.2167 0.0470 0.0449 -0.2072 0.0429
2015/016 0.3143 0.2058 0.0424 0.1343 0.6525 0.4258
2016/017 -0.3858 -0.4943 0.2443 0.1057 -0.2138 0.0457
Total 0.9762 -0.0003 3.9896 2.2548 -0.0002 1.8184
Source: Calculated on basic data extracted from NEPSE and annual report of Bank

∑𝑛 ̅ 2
𝑗=1(𝑅𝑗 −𝑅𝑗 ) 3.9896
𝟐
a. Variance(𝝈 ) : = = 0.4987
𝑛−1 9−1
∑ 𝑅𝑗 0.9762
b. Average rate of return = = = 0.1085 = 10.85%
𝑛 9

c. Standard deviation (𝝈) = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = √0.4987 = 0.7062=70.62%

d. Total risk (2 )= 0.4987
e. Systematic risk = 𝛽𝑗 2 × 𝜎𝑚 2 = 1.2402 2 × 0.2273 = 0.3496
f. Unsystematic = 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 – 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘
= 0.4987 -0.3496 = 0.1491
∑𝑛 ̅ ̅
𝑗=1(𝑅𝑗 −𝑅𝑗 )(𝑅𝑚 −𝑅𝑚 ) 2.2548
g. 𝐂𝐨𝐯𝐚𝐫𝐢𝐚𝐧𝐜𝐞(𝑹𝒋 × 𝑹𝒎 ) = = = 0.2819
𝑛−1 9−1
𝐶𝑜𝑣(𝑅𝑗 ×𝑅𝑚 ) 0.2819
h. Beta Coefficient(𝜷𝒋 ) = = =1.2402
𝜎𝑚 2 0.2273
𝜎𝑗 0.7062
i. 𝐂𝐨𝐞𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐭𝐢𝐨𝐧 = = = 6.51
𝑅̅𝑗 0.1085
 77

Appendix VI
Calculation of Standard Deviation, Variance, Coefficient of Variation of Market and
Commercial Bank.
Commercial
Fiscal Market
Bank Return (𝑅𝑚 − 𝑅̅𝑚 ) (𝑅𝑐 − 𝑅̅𝑐 ) (𝑅𝑚 − 𝑅̅𝑚 )2 (𝑅𝑐 − 𝑅̅𝑐 )2
Year (𝑅𝑚 )
(𝑅𝑐 )
2007/08 - - - - - -
2008/09 -0.2224 -0.2078 -0.3573 -0.3390 0.1277 0.1149
2009/10 -0.3623 -0.4148 -0.4972 -0.5460 0.2472 0.2981
2010/11 -0.2405 -0.2806 -0.3754 -0.4118 0.1409 0.1696
2011/12 0.0741 0.0909 -0.0608 -0.0403 0.0037 0.0016
2012/13 0.3299 0.4097 0.1950 0.2785 0.0380 0.0776
2013/14 0.9989 0.8695 0.8640 0.7383 0.7465 0.5451
2014/15 -0.0723 -0.1203 -0.2072 -0.2515 0.0429 0.0633
2015/16 0.7874 0.8930 0.6525 0.7618 0.4258 0.5803
2016/17 -0.0789 -0.0584 -0.2138 -0.1896 0.0457 0.0359
Total 1.2139 1.1811 0 0 1.8184 1.8864

∑𝑛 ̅ 2
𝑗=1(𝑅𝑚 −𝑅𝑚 ) 1.8184
Variance of Market(𝝈𝟐𝒎 ): = = 0.2273
𝑛−1 9−1
∑𝑛 ̅ 2
𝑗=1(𝑅𝑐 −𝑅𝑐 ) 1.8864
Variance of Commercial Bank Index(𝝈𝟐𝒄 ): = = 0.2358
𝑛−1 9−1

Standard Deviation of Market(σm ) = √0.2273 = 0.4768 = 47.68%

Standard Deviation of Commercial Bank (σc ) = √0.2358 = 0.4856 = 48.56%
𝜎 0.4768
Coefficient of Variation of Market = 𝑅𝑚 = 0.1349 = 3.53
𝑚

σ 0.4856
Coefficient of Variation of Commercial Bank = Rc = 0.1312 = 3.70
c
 78

Appendix VII
Calculation of required rate of return of sampled banks using CAPM
Banks Beta (𝛃𝐣 ) Required rate of return(𝐑 𝐫 ) Risk Premium =
̅̅̅̅ + [𝐄(𝐑
= 𝐑𝐟 ̅̅̅̅] × 𝛃𝐣
̅ 𝐦 ) − 𝐑𝐟 ̅̅̅̅
𝑹𝒓 − 𝐑𝐟
HBL -0.1742 4.08 + (13.49 − 4.08) × (−0.1742) -1.64%
= 2.44%
EBL 0.8822 4.08 + (13.49 − 4.08) × (0.8822) 8.30%
= 12.38%
MBL 0.6410 4.08 + (13.49 − 4.08) × (0.6410) 6.03%
= 10.11%
SBL 1.2402 4.08 + (13.49 − 4.08) × (1.2402) 11.67%
= 15.75%
 79

Appendix VIII
Calculation of Correlation between risk and expected return of sampled banks.
Banks Risk (𝑿) Return(𝒀) 𝑿𝒀 𝑿𝟐 𝒀𝟐

HBL 0.5968 0.1639 0.0978 0.3562 0.0269

EBL 0.4685 0.3560 0.1668 0.2195 0.1267

MBL 0.8420 0.2747 0.2313 0.7090 0.0755

SBL 0.7062 0.1085 0.0766 0.4987 0.0118

Total 2.6135 0.9031 0.5725 1.7833 0.2408

Here,
N = 4, ∑X= 2.6135, ∑Y=0.9031, ∑X2 = 1.7833, ∑Y2 = 0.2408, ∑XY = 0.5725

NXY  X  Y
Coefficient of Correlation (r) =
NX 2  X  NY 2  Y 
2 2

4×0.5725−2.6135×0.9031
=
√4×1.7833−(2.6135)2 √4×0.2408−(0.9031)2
−0.07025
=
√0.3028√0.1476
−0.07025
= 0.2114

= -0.33

1−𝑟 2
Probable Error (P.E) = 0.6745
√𝑛
1−(−0.33)2
= 0.6745
√4
1−0.1089
= 0.6745 2
0.6745×0.8911
= 2

= 0.30
 80

Appendix IX:

Logical Framework
Problems Objectives Table Findings Conclusions Recommendations

The stock price and annual rate of return of
HBL is fluctuating trend line over the period.
Standard deviation of stock and dividend is
4.1 Rs.497.26 and Rs.17.00 respectively. The
annual average rate of return and its standard
To identify deviation of HBL is 16.39 percent and 59.68
What is the percent respectively.
the annual
average rate
average rate The stock price and annual rate of return of
of return of
of return of EBL is in decreasing trend up to F/Y 2011/12.
commercial
commercial After that, there is increasing trend line up to
banks?
banks F/Y 2013/14 then, after fluctuating trend. The
4.2 standard deviation of price and dividend is
Rs.835.33 and Rs.13.95 respectively. The
annual average rate of return of EBL and
standard deviation of return is 3.56 percent and
46.85 percent respectively.
The stock price and annual rate of return The sampled banks are
indicates the performance of related recommended to
banks. Hence, MBL performs best and increase the annual rate
EBL performs worst in terms of annual of return and there by
rate of return and average rate of return. the average, rate of
MBL has become able to pay good return return. For that, banks
than the other sampled bank in overall are advised to increase
sampled period. The EBL has not been their dividend through
able to pay adequate return for their quality of lending,
investor over the period. There is also speedy recovery etc.
significant difference between the average
rate of return of HBL and SBL. HBL
performs better than SBL.
 81

The stock price and annual rate of return of

MBL is fluctuating trend line over the period.
The minimum stock price in F/Y 2012/13 is
Rs.203 and maximum is Rs.1,285 in F/Y
4.3
2009/10. The average rate of return of MBL is
27.47 percent and most negative return in F/Y
2010/11 i.e. -65.60 percent and highest return is
Rs.183.74 in F/Y 2013/14.

The stock price and annual rate of return of

SBL is fluctuating over the period. The
minimum and maximum stock price of SBL is
Rs.270 in F/Y 2010/11 and Rs.1,090 in F/Y
2007/08 respectively. The average annual rate
4.4
of return of SBL is 10.85 percent and standard
deviation from return is 70.62 percent over the
period. SBL has most negative return is -53.94
percent in F/Y 2009/10 and highest positive
return is 180.74 percent in F/Y 2013/14.

The average market return is 13.49 percent, The market return is fluctuating over the Beta concern with
What is the
most negative return is -36.23 percent in F/Y period. The average market rate of return volatility relative to
market rate To analyze the
2009/10 and highest positive return is 99.89 is 13.49 percent; the overall market return overall stock market. So
of return and market rate of
4.6 percent in F/Y 2013/14 over the sampled has a symbolic return to investors. The the banks are suggested
beta of return and
period. positive and two digit return is favor on to decrease their beta
commercial beta?
investor’s point of view. coefficient throughout
banks?
the increase annual rate

The average commercial bank return is 13.12
percent over the period. The highest
commercial bank index is Rs.1,573.71 in the
F/Y 2015/16, and lowest index is Rs.328.70 in
4.7
F/Y 2010/11. The most negative return of
commercial bank return is -41.48 percent in
F/Y 2009/10 and highest positive return is
89.30 percent in F/Y 2015/16.
The rate of treasury bills return over the period
is 4.08 percent. The maximum treasury bills
return is 8.56 percent in F/Y 2010/11 and
4.8 lowest treasury return is 1.27 percent in F/Y
2013/14.
The beta coefficient of sampled commercial
bank is -0.1742, 0.8822, 0.6410 and 1.2402 for
HBL, EBL, MBL and SBL respectively. The
beta coefficient shows relatively high risk i.e.
4.9
1.2402 of SBL and low risk i.e. -0.1742 of HBL
than others.
What is the To examine The systematic risk of HBL, EBL, MBL and The systematic risk is known as the The bank should try to
4.9
systematic the systematic SBL are 0.0069, 0.1769, 0.093 and 0.3496 uncontrollable or non-diversifiable risk. minimize unsystematic
82
The average commercial bank return is of return and covariance
near to market return. The commercial with market return.
bank return is two-digit return so the
investor can easily invest to the
commercial banks stock.
The treasury bills return fluctuating over
the period. The treasury bills return
indicates the risk free rate of return. The
treasury bills return help to take
investment decision. In this study the
treasury bills return is adequate to invest
on security market.
The beta coefficient shows relatively high
risk and low risk of securities. Positive
and higher beta shows the high risk and
vice versa. SBL is facing the high risk
and HBL is facing low risk in terms of
beta coefficient. MBL and EBL has
moderate risk with positive beta
coefficient.
 83

and risk and respectively. The unsystematic risk of HBL, The systematic risk of SBL is higher and risks through proper
unsystematic unsystematic EBL, MBL and SBL are 0.3493, 0.0426, HBL is significantly lower than others internal management
risk of risk of 0.6159 and 0.1491 respectively. have. The higher systematic risk refers the and control.
commercial commercial unfavorable with market or vice versa.
banks? banks. EBL and MBL have moderate risk in
terms of systematic risk. The
unsystematic risk refers controllable risk
or management risk. The unsystematic
risk of MBL is higher and EBL has lower
risk than others have. HBL and SBL have
moderate level of unsystematic risk.

The total risk of HBL, EBL, MBL and SBL are The total risk is combination of The banks are suggested
0.3562, 0.2195, 0.7089 and 0.4987 systematic and unsystematic risk. The to minimize the total risk
respectively. The return of the bearing of risk is total risk of MBL is significantly higher and try to increase return
16.39 percent, 3.56 percent, 27.47 percent and and EBL have lower than others. HBL throughout the stable
10.85 percent for HBL, EBL, MBL and SBL and EBL have moderate level of total risk. dividend policy and
What is the 4.9
respectively. The return of MBL is higher and that of management control.
total risk and To analyze the EBL is significantly lower. In the
return total risk and comparison of market, return MBL and
position of return position HBL have higher return and SBL and
the of commercial EBL have lower return.
commercial banks.
banks? The correlation coefficient between risk and The correlation coefficient of risk and
return of sampled bank is -0.33. There is weak return of sampled banks has low degree of
degree of correlation between risk and return of negative correlation. Therefore, the risk
4.11
sampled banks. and return of sampled banks are
negatively associated.
 84

HBL and MBL is under price due to higher The stock of HBL and MBL is The sampled banks
average rate of return i.e.16.39 percent and underpriced due to higher average rate of should apply proper
27.47 percent in respect to required rate of return in comparison of required rate of dividend policy to
To compute return i.e. 2.44 percent and 10.11 percent return. The investors should buy HBL and increase the value of
What is the
the over and respectively. MBL stocks due to underpriced. EBL and stock. The banks are
price
under price of SBL is overpriced due to lower average suggested to follow the
moment of 4.10 EBL and SBL is over price due to lower
sampled rate of return in respect to required rate of market scenario and to
commercial average rate of return i.e. 3.56 percent and
commercial return. The investors should sell the EBL take the decision of
banks? 10.85 percent in respect to required rate of
banks. and SBL stocks as they are overpricing. dividend policy.
return i.e. 12.38 percent and 15.75 percent
respectively.