Risk & Return

[Analysis of Risk and Return with respect to Low and High Speculative [2008]
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A RESEARCH REPORT
ON
“Analysis of Risk and Return with respect to Low and
High Speculative Stock”
Submitted in partial fulfillment of the requirements of

the M.B.A Degree Course of Bangalore University
Submitted By
YASHWANT SINGH
(06XQCM6089)
Under the Guidance and Supervision
Of
PROF. PRAVEEN BHAGAWAN
M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 1

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# 43, Race Course Road, Bangalore-560001

2006-2008
STUDENT’S DECLARATION
I, YASHWANT SINGH hereby declare that this research project entitled
“Analysis of Risk and Return with respect to Low and High Speculative Stock”
has been undertaken and completed by me under the valuable guidance of Prof.
PRAVEEN BHAGAWAN, faculty member, M.P BIRLA INSTITUTE OF
MANAGEMENT in partial fulfillment of Master of Business Administration (MBA)
program and it is my original work and not submitted for the award of any other
degree, diploma, fellowship or other similar title or prizes.
PLACE: BANGALORE YASHWANT SINGH
DATE: (06XQCM6089)

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PRINCIPAL’S CERTIFICATE
This is to certify that this dissertation entitled “Analysis Risk and Return with
respect to Low and High Speculative Stock” is the result of the work carried out by
Mr. YASHWANT SINGH under the guidance and supervision of Prof. PRAVEEN
BHAGAWAN, of M. P. Birla Institute of Management, Bangalore as per the
requirements of the Bangalore University, MBA syllabus. This report has not formed
the basis for the award of any other degree.
Place :Bangalore (Dr.Nagesh.S.Malavalli)
Date: Principal

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GUIDE’S CERTIFICATE
I, here by certify that this dissertation entitled “Analysis Risk and Return of Stock
with Low and High Speculative Stock” is done by Mr. YASHWANT SINGH
bearing registration number 06XQCM6089, under my guidance and supervision as
per the requirements of the Bangalore University, MBA syllabus. This report has not
formed the basis for the award of any other degree.
Place: Bangalore (Prof. Praveen Bhagawan)

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Date: Faculty (MPBIM)
ACKNOWLEDGEMENT
Preparing a project report of this nature is an arduous task and I am fortunate enough
to get support form a large number of persons to whom I shall always remain grateful.
Firstly, I would like to thank Dr. N.S. MALAVALLI, Principal, M.P Birla Institute of
Management for his kind support and giving me the opportunity to present this project.
I am very thankful to my guide Prof. PRAVEEN BHAGAWAN, faculty member, M.P

BIRLA INSTITUTE OF MANAGEMENT for the valuable advice, guidance, precious
time and support who motivated and supported me a lot in carrying out this project.
Last but not the least; I would like to thank all the respondents for giving me their
precious time and relevant information and experience I required without which this
project would have been a different story.

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Place: Bangalore YASHWANT SINGH
Date: (06XQCM6089)
CONTENTS
Particulars Page No.
RESEARCH EXTRACT 2
INTRODUCTION 3
RISK 4
BETA 16
ALPHA 18
STANDARD DEVIATION 20
CORRELATION 22
F-TEST 23
SPECULATION 24

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LITERATURE REVIEW 27
PROBLEM STATEMENT 33
RESEARCH METHODOLOGY 34
ANALYSIS INTERPERTATION 38
FINDINGS 70
CONCLUSION 71
SUGGESTIONS 72
BIBLIOGRAPHY 73
ANNEXURE 74

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LIST OF TABLE
PARTICULARS PAGE NO.
SMALL AND MEDIUM STOCKS
• 3I INFOTECH LTD. 39
• TATA ELXSI LTD. 42
• ZENITH INFOTECH LTD. 45
• SUBEX LTD. 48
• DATANET SYSTEMS LTD. 50
LARGE STOCKS
• HCL TECHNOLOGIES LTD. 53
• INFOSYS TECHNOLOGIES LTD. 56
• TCS LTD. 58
• WIPRO LTD. 60
• SATYAM COMPUTER SERVICE LTD. 62

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CHAPTER- 2

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2.1 RESEARCH EXTRACT
EVERY investment is associated with some amount of risk. Some investment has low
risk and for the same amount of there might be a difference of risk. As a financial
manager one of the basic jobs is to get higher amount of return at lower risk.
When an investor buys stock or takes an equity position in a firm, he or she is

exposed to many risks. Some risk may affect only one or a few firms and it is this risk
that we categorize as firm-specific risk. Within this category, we would consider a
wide range of risks, starting with the risk that a firm may have misjudged the demand
for a product from its customers; we call this project risk.
As an investor, you could invest your entire portfolio in one asset. If you do so, you are
exposed to both firm-specific and market risk. If, however, you expand your portfolio to
include other assets or stocks, you are diversifying, and by doing so, you can reduce
your exposure to firm-specific risk. There are two reasons why diversification reduces
or, at the limit, eliminates firm specific risk. The first is that each investment in a
diversified portfolio is a much smaller percentage of that portfolio than would be the
case if you were not diversified.
In this project risk per unit of return is calculated to find out the best return per unit of
risk. Mean, correlation, standard deviation, beta alpha is being calculated.

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F-test is done on return average and standard deviation to find out to see whether
there is variance or not.
2.2 INTRODUCTION
The basic motive for the firm’s financial management regarding any investment
is that the investment should increase the value of the equity. So in order for a
firm’s management to choose only those investments which meet this
maximization of equity value criterion, they must choose only those investments
whose present value to the owners exceeds the cost of investment. However to
determine the capitalized value of an asset the firm’s financial management must
be able to estimate the cash flows which will accrue and be distributed to the
stockholders from the investment and the rate at which these flows are capitalized
by the market. To identify this capitalization rate or required return on equity and
its relation to various types of investment risks is the aim of the stock with low
value high speculation.
This empirical research intends to arrive at the required rate of return based on
the five variables which are divided into two parts; viz:

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¾ The distribution variables: standard deviation, skewness and

covariance and;
¾ The financial risk variables: debt-equity ratio and dividend

payout ratio.
2.3 RISK
Risk, for most of us, refers to the likelihood that in life’s games of chance, we will
receive an outcome that we will not like. For instance, the risk of driving a car too fast
is getting a speeding ticket, or worse still, getting into an accident. Webster’s
dictionary, in fact, defines risk as “exposing to danger or hazard”. Thus, risk is
perceived almost entirely in negative terms.
In finance, our definition of risk is both different and broader. Risk, as we see it, refers
to the likelihood that we will receive a return on an investment that is different from the
return we expected to make. Thus, risk includes not only the bad outcomes, i.e.,
returns that are lower than expected, but also good outcomes, i.e., returns that are
higher than expected. In fact, we can refer to the former as downside risk and the
latter is upside risk; but we consider both when measuring risk.
Risk is a concept that denotes a potential negative impact to an asset or some
characteristic of value that may arise from some present process or future event. In
everyday usage, risk is often used synonymously with the probability of a known loss.

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Paradoxically, a probable loss can be uncertain and relative in an individual event

while having a certainty in the aggregate of multiple events.
Qualitatively, risk is considered proportional to the expected losses which can be

caused by an event and to the probability of this event. The harsher the loss and the
more likely the event, the greater the overall risk.
CLASSIFICATION OF RISK
Risk can be classified into the following categories:
• Systematic risk
• Unsystematic risk
Systematic risk: The systematic risk affects the entire market. Also known as "un-
diversifiable risk" or "market risk." Systematic risk is a risk of security that cannot be
reduced through diversification. This indicates that the entire market is moving in a
particular direction either downward or upward. The economic conditions, political
situations and sociological changes affect the security market.
Variability in a security’s total returns that is directly associated with overall
movements in the general market or economy is called systematic or market or
general risk. In other words, Systematic risk is the risk attributable to broad macro
factors affecting all securities.
Virtually all securities have some systematic risk, whether bonds or stocks,
because systematic risk directly encompasses the interest rate, market risk and
inflation risk. The investor cannot escape this part of risk, because no matter how well
he or she diversifies, the risk of the overall market cannot be avoided.

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The systematic risk is further sub-divided into-
• Market Risk
• Purchasing Power Risk
• Interest Rate Risk
MARKET RISK:
Jack Clark Francis has defined market risk as that portion of total variability of return
caused by the alternating forces of bull and bear markets. When the security index
moves upward with frequent irregular pauses for a significant period of time, it is
known as bull market. In the bull market, the index moves from a low level to the peak.
Bear market is just a reverse to the bull market; the index declines haltingly from the
peak to a market low point called trough for a significant period of time. During the bull
and bear market more than 80 per cent of the securities’ prices rise or fall along with
the stock market indices.
The forces that affect stock market are tangible and intangible events. The tangible
events are real events such as earthquake, war, political uncertainty, an election year,
illness or death of president, and fall in the value of currency.
Intangible events are related to market psychology. The market psychology is

affected by the real events. But reactions to the tangible events become over
reactions and they push the market in a particular direction.
For example: The Bull Run in 1994 FII’s investment and liberalization policies gave
buoyancy to the market. The market psychology was positive. Small investors entered

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the market and prices of stocks without adequate supportive fundamental factors
soared up.
In 1996, the political turmoil and recession in the economy resulted in the fall of share
prices and the small investors lost faith in the market. There was a rush to sell the
shares and the stocks that were floated in the primary market were not received well.
The market risk in equity shares is much greater than it is in bonds. Equity
shares value and prices are related in some fashion to earnings. Current and
prospective dividends, which are made possible by earnings, theoretically, should be
capitalized at a rate that will provide yields to compensate for the basic risks.
In short, the crux of the market risk is likelihood of incurring capital losses from
price changes engendered by a speculative psychology.
PURCHASING POWER RISK:
The negative relation between equity valuations and expected inflation is found to be
the result of two effects: a rise in expected inflation coincides with both (i) lower
expected real earnings growth and (ii) higher required real returns.
A one percentage point increase in expected inflation is estimated to rise required

real stock returns about one percentage point, which on average would imply a 20
percent decline in stock prices.

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But the inflation factor in expected real stock returns is also in long-term Treasury
yields; consequently, expected inflation has little effect on the long-run equity
premium.
Variations in the returns are caused also by the loss of purchasing power of currency.
Inflation is the reason behind the loss of purchasing power. Purchasing power risk is
the probable loss in the purchasing power of the returns to be received. The rise in
price penalizes the returns to the investor, and every potential rise in the price is a risk
to the investor.
INTEREST RATE RISK:
A major source of risk to the holders of high quality bonds is changes in interest rates,
commonly referred to an interest rate risk. These high- quality bonds are not subject to
either substantial business risk or financial risk.
If there is an increase in risk free rate of interest (i.e., MIBOR, interest rate on
government bonds and interest rate on treasury bills), then there would be definite
shift in the funds from low yielding bonds to high yielding bonds and from stocks to
bonds.
Likewise, if the stock market is in a depressed condition, investors would like to shift
their money to the bond market, to have an assured rate of return.For example: The
best example is that in April 1996, most of the initial public offerings of many
companies remained undersubscribed but IDBI and IFC bonds were oversubscribed.
The assured rate of return attracted the investors from the stock market to the bond
market.

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UNSYSTEMATIC RISK
Unsystematic risk is unique and peculiar to an industry or to a firm. Unsystematic risk

stems from managerial inefficiency, technological change in the production process,
availability of raw materials, change in the consumer preference, and lobour problems.
The nature and magnitude of above factors differ from industry to industry, and
company to company.
Technological changes affect the information technology industry more than that of
consumer product industry. Thus it differs from industry to industry.
The changes in the consumer preference affect the consumer products like
television sets, washing machines, refrigerators, etc more than they affect the iron and
steel industry.
Unsystematic risk can be classified into two categories namely:
• Business Risk
• Financial Risk
BUSINESS RISK
Business risk, which is sometimes called operating risk, is the risk associated with the
normal day-to-day operations of the firm. Business risk is concerned to Earnings
before interest and tax. Earnings before interest and taxes can be viewed as the
operating profit of the firm; that is, the profit of the firm before deducting financing
charges and taxes. Business risk represents the chance of loss and the variability of
return created by a firm’s uses of funds. The two components of business risk signify
the chance that the firm will fail because of the inability of the assets of the firm to
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generate a sufficient level of earnings before interest and the variability of such
earnings.
FINANCIAL RISK:
Financial risk is created by the use of fixed cost securities (i.e., debt and preference
shares). Financial risk is the chance of loss and the variability of the owner’s return
created by a firm’s sources of funds. Financial risk is the chance of loss and the
variability of the owners’ return created by a firm’s sources of funds. The two
components of financial risk reflect the chance that the firm will fail because of the
inability to meet interest and/ or principal payments on debt, and the variability of
earnings available to Equity holders caused by fixed financing changes (i.e., interest
expense and preferred dividends). In case the firm does not employ debt, there will be
no financial risk.
An important aspect of financial risk is the interrelationship between financial
risk and business risk. In effect, business risk is basic to the firm, but the firm, but the
firm’s risk can be affected by the amount of debt financing used by the firm. Whatever
be the amount of business risk associated with the firm, the firm’s risk will be
increased by the use of debt financing. As a result, it follows that the amount of debt
financing used by the firm should be determined largely by the amount of business
risk that the firm that the firm faces. If its business risk is low, then it can use more
debt financing without fear of default, or a marked impact on the earnings available to
the equity share holders. Conversely, if the firm faces, a lot of business risk, then the
use of a lot of debt financing may jeopardize the firm’s operations.

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DIVERSIFIABLE AND NON-DIVERSIFIABLE RISK

Although there are many reasons that actual returns may differ from expected returns,
we can group the reasons into two categories: firm-specific and market-wide. The
risks that arise from firm-specific actions affect one or a few investments, while the risk
arising from market-wide reasons affect many or all investments. This distinction is
critical to the way we assess risk in finance.
THE COMPONENTS OF RISK
When an investor buys stock or takes an equity position in a firm, he or she is

exposed to many risks. Some risk may affect only one or a few firms and it is this risk
that we categorize as firm-specific risk. Within this category, we would consider a
wide range of risks, starting with the risk that a firm may have misjudged the demand
for a product from its customers; we call this project risk. For instance, in the coming
chapters, we will be analyzing Boeing’s investment in a Super Jumbo jet. This
investment is based on the assumption that airlines want a larger airplane and are will
be willing to pay a higher price for it. If Boeing has misjudged this demand, it will
clearly have an impact on Boeing’s earnings and value, but it should not have a
significant effect on other firms in the market. The risk could also arise from
competitors proving to be stronger or weaker than anticipated; we call this
competitive risk. For instance, assume that Boeing and Airbus are competing for an
order from Quantas, the Australian airline. The possibility that Airbus may win the bid
is a potential source of risk to Boeing and perhaps a few of its suppliers. But again,
only a handful of firms in the market will be affected by it. Similarly, the Home Depot
recently launched an online store to sell its home improvement products. Whether it

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succeeds or not is clearly important to the Home Depot and its competitors, but it is
unlikely to have an impact on the rest of the market. In fact, we would extend our risk
measures to include risks that may affect an entire sector but are restricted to that
sector; we call this sector risk. For instance, a cut in the defense budget in the United
States will adversely affect all firms in the defense business, including Boeing, but
there should be no significant impact on other sectors, such as food and apparel.
What is common across the three risks described above project, competitive and
sector risk – is that they affect only a small sub-set of firms. There is other risk that is
much more pervasive and affects many if not all investments. For instance, when
interest rates increase, all investments are negatively affected, albeit to different
degrees. Similarly, when the economy weakens, all firms feel the effects, though
cyclical firms (such as automobiles, steel and housing) may feel it more. We term this
risk market risk.
Finally, there are risks that fall in a gray area, depending upon how many assets they
affect. For instance, when the dollar strengthens against other currencies, it has a
significant impact on the earnings and values of firms with international operations. If
most firms in the market have significant international operations, it could well be
categorized as market risk. If only a few do, it would be closer to firm-specific risk.

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WHY DIVERSIFICATION REDUCES OR ELIMINATES FIRM-SPECIFIC

RISK: AN INTUITIVE EXPLANATION
As an investor, you could invest your entire portfolio in one asset, say Boeing. If you
do so, you are exposed to both firm-specific and market risk. If, however, you expand
your portfolio to include other assets or stocks, you are diversifying, and by doing so,
you can reduce your exposure to firm-specific risk. There are two reasons why
diversification reduces or, at the limit, eliminates firm specific risk. The first is that each
investment in a diversified portfolio is a much smaller percentage of that portfolio than
would be the case if you were not diversified. Thus, any action that increases or
decreases the value of only that investment or a small group of investments will have
only a small impact on your overall portfolio, whereas undiversified investors are much
more exposed to changes in the values of the investments in their portfolios. The
second reason is that the effects of firm-specific actions on the prices of individual
assets in a portfolio can be either positive or negative for each asset for any period.
Thus, in very large portfolios, this risk will average out to zero and will not affect the
overall value of the portfolio. In contrast, the effects of market-wide movements are
likely to be in the same direction for most or all investments in a portfolio, though some
assets may be affected 12 more than others. For instance, other things being equal,

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an increase in interest rates will lower the values of most assets in a portfolio. Being
more diversified does not eliminate
this risk.
MODELS OF DEFAULT RISK
The risk that we have discussed relates to cash flows on investments being different
from expected cash flows. There are some investments, however, in which the cash
flows are promised when the investment is made. This is the case, for instance, when
you lend to a business or buy a corporate bond; the borrower may default on interest
and principal payments on the borrowing. Generally speaking, borrowers with higher
default risk should pay higher interest rates on their borrowing than those with lower
default risk. This section examines the measurement of default risk and the
relationship of default risk to interest rates on borrowing. In contrast to the general risk
and return models for equity, which evaluate the effects of market risk on expected
returns, models of default risk measure the consequences of firm-specific default risk
on promised returns. While diversification can be used to explain why firm-specific risk
will not be priced into expected returns for equities, the same rationale cannot be
applied to securities that have limited upside potential and much greater downside
potential from firm-specific events. To see what we mean by limited upside potential,

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consider investing in the bond issued by a company. The coupons are fixed at the
time of the issue and these coupons represent the promised cash flow on the bond.
The best case scenario for you as an investor is that you receive the promised cash
flows; you are not entitled to more than these cash flows even if the company is wildly
successful. All other scenarios contain only bad news, though in varying degrees, with
the delivered cash flows being less than the promised cash flows.
Consequently, the expected return on a corporate bond is likely to reflect the firm
specific default risk of the firm issuing the bond.
THE DETERMINANTS OF DEFAULT RISK
The default risk of a firm is a function of two variables. The first is the firm’s capacity to
generate cash flows from operations and the second is its financial obligations –
including interest and principal payments7. Firms that generate high cash flows
relative to their financial obligations should have lower default risk than firms that
generate low cash flows relative to their financial obligations. Thus, firms with
significant existing investments, which generate relatively high cash flows, will have
lower default risk than firms that do not. In addition to the magnitude of a firm’s cash
flows, the default risk is also affected by the volatility in these cash flows. The more
stability there is in cash flows the lower the default risk in the firm. Firms that operate
in predictable and stable businesses will have lower default risk than will other similar
firms that operate in cyclical or volatile businesses. Most models of default risk use

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financial ratios to measure the cash flow coverage (i.e., the magnitude of cash flows
relative to obligations) and control for industry effects to evaluate the variability in cash
flows.
THE RISK OF AN INDIVIDUAL ASSET
• The risk of any asset is the risk that it adds to the market portfolio.
• Statistically, this risk can be measured by how much an asset moves with the
market (called the covariance).
• Beta is a standardized measure of this covariance

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• Beta is a measure of the non-diversifiable risk for any asset can be measured
by the covariance of its returns with returns on a market index, which is defined
to be the asset's beta.
• The cost of equity will be the required return,
Cost of Equity = Rf + Equity Beta * (E(Rm) - Rf)
where,
Rf = Riskfree rate
E (Rm) = Expected Return on the Market Index
2.3 BETA
The Beta coefficient, in terms of finance and investing, is a measure of volatility of a

stock or portfolio in relation to the rest of the financial market.
An asset with a beta of 0 means that its price is not at all correlated with the market;
that asset is independent. A positive beta means that the asset generally follows the

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market. A negative beta shows that the asset inversely follows the market; the asset
generally decreases in value if the market goes up.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It
measures the part of the asset's statistical variance that cannot be mitigated by the
diversification provided by the portfolio of many risky assets, because it is correlated
with the return of the other assets that are in the portfolio. Beta is calculated for
individual companies using regression analysis.
The formula for the Beta of an asset within a portfolio is
Where
ra measures the rate of return of the asset,
rp measures the rate of return of the portfolio of which the asset is a part and
Cov(ra,rp) is the covariance between the rates of return.
In the CAPM formulation, the portfolio is the market portfolio that contains all risky
assets, and so the rp terms in the formula are replaced by rm, the rate of return of the
market.
Beta is also referred to as financial elasticity or correlated relative volatility, and can
be referred to as a measure of the asset's sensitivity of the asset's returns to market
returns, its non-diversifiable risk, its systematic risk or market risk. On an individual
asset level, measuring beta can give clues to volatility and liquidity in the marketplace.

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On a portfolio level, measuring beta is thought to separate a manager's skill from his
or her willingness to take risk.
The beta movement should be distinguished from the actual returns of the stocks. For
example, a sector may be performing well and may have good prospects, but the fact
that its movement does not correlate well with the broader market index may decrease
its beta. However, it should not be taken as a reflection on the overall attractiveness or
the loss of it for the sector, or stock as the case may be. Beta is a measure of risk and
not to be confused with the attractiveness of the investment.
The beta coefficient was born out of linear regression analysis. It is linked to a
regression analysis of the returns of a portfolio (such as a stock index) (x-axis) in a
specific period versus the returns of an individual asset (y-axis) in a specific year.
The regression line is then called the Security Characteristic Line (SCL).
αa is called the asset's alpha coefficient
βa is called the asset's beta coefficient.
Both coefficients have an important role in Modern portfolio theory.
For example, in a year where the broad market or benchmark index returns 25%
above the risk free rate, suppose two managers gain 50% above the risk free rate.
Since this higher return is theoretically possible merely by taking a leveraged position
in the broad market to double the beta so it is exactly 2.0, we would expect a skilled
portfolio manager to have built the outperforming portfolio with a beta somewhat less
than 2, such that the excess return not explained by the beta is positive. If one of the
managers' portfolios has an average beta of 3.0, and the other's has a beta of only

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1.5, then the CAPM simply states that the extra return of the first manager is not
sufficient to compensate us for that manager's risk, whereas the second manager has
done more than expected given the risk. Whether investors can expect the second
manager to duplicate that performance in future periods is of course a different
question.

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2.4 ALPHA
Alpha is a risk-adjusted measure of the so-called "excess return" on an investment. It

is a common measure of assessing an active manager's performance as it is the
return in excess of a benchmark index.
The difference between the fair and actually expected rates of return on a stock is
called the stock's alpha.
The alpha coefficient (αi) is a parameter in the capital asset pricing model. In fact it is
the intercept of the Security Characteristic Line (SCL). One can prove that in an
efficient market, the expected value of the alpha coefficient equals the return of the
risk free asset.
A share’s alpha value is a measure of its abnormal return, and represents the amount
by which the share’s returns are currently above, or below the required return, given
its systematic risk.
INTERPRETATION OF ALPHA
Alpha values assume significance in the investment market. They help an

investor decide whether stocks are undervalued, overvalued or rightly valued. The
following rules would help make the choice.
Rule 1: A positive Alpha value indicates that the expected return from this stock could
be higher than the mandated by CAPM to the extent of the alpha value. Hence stocks
with positive alpha should be considered as under valued stocks. Such stocks are
therefore much sought after in the market and should be bought.

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Rule2: A negative Alpha value indicates that the expected return from this stock will be
less than the mandated by CAPM to the extent of the alpha value. Hence stocks with
negative alpha should be considered as over valued stocks. Such stocks are to be
sold.
2.5 STANDARD DEVIATION
In probability and statistics, the standard deviation of a probability distribution,

random variable, or population or multiset of values is a measure of the spread of its
values. The standard deviation is usually denoted with the letter σ (lower case sigma).
It is defined as the square root of the variance.
To understand standard deviation, keep in mind that variance is the average of the
squared differences between data points and the mean. Variance is tabulated in units
squared. Standard deviation, being the square root of that quantity, therefore
measures the spread of data about the mean, measured in the same units as the
data.
In finance, standard deviation is a representation of the risk associated with a given

security (stocks, bonds, property, etc.), or the risk of a portfolio of securities. Risk is an
important factor in determining how to efficiently manage a portfolio of investments
because it determines the variation in returns on the asset and/or portfolio and gives
investors a mathematical basis for investment decisions. The overall concept of risk is
that as it increases, the expected return on the asset will increase as a result of the
risk premium earned – in other words, investors should expect a higher return on an
investment when said investment carries a higher level of risk.
For example, you have a choice between two stocks: Stock A historically returns 5%
with a standard deviation of 10%, while Stock B returns 6% and carries a standard

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deviation of 20%. On the basis of risk and return, an investor may decide that Stock A
is the better choice, because Stock B's additional percentage point of return generated
(an additional 20% in dollar terms) is not worth double the degree of risk associated
with Stock A. Stock B is likely to fall short of the initial investment more often than
Stock A under the same circumstances, and will return only one percentage point
more on average. In this example, Stock A has the potential to earn 10% more than
the expected return, but is equally likely to earn 10% less than the expected return.
Calculating the average return (or arithmetic mean) of a security over a given number
of periods will generate an expected return on the asset.
For each period, subtracting the expected return from the actual return results in the
variance. Square the variance in each period to find the effect of the result on the
overall risk of the asset. The larger the variance in a period, the greater risk the
security carries. Taking the average of the squared variances results in the
measurement of overall units of risk associated with the asset. Finding the square root
of this variance will result in the standard deviation of the investment tool in question.

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2.6 CORRELATION
In the world of finance, a statistical measure of how two securities moves in relation to
each other. C Correlation is computed into what is known as the correlation
coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation
co-efficient of +1) implies that as one security moves, either up or down, the other
security will move in lockstep, in the same direction. Alternatively, perfect negative
correlation means that if one security moves in either direction the security that is
perfectly negatively correlated will move by an equal amount in the opposite direction.
If the correlation is 0, the movements of the securities is said to have no correlation, it
is completely random. If one security moves up or down there is as good a chance
that the other will move either up or down, the way in which they move is totally
random.
In real life however you likely will not find perfectly correlated securities, rather you will
find securities with some degree of correlation. For example, the performance of two
stocks within the same industry is strongly positively correlated although it may not be
exactly +1.correlations are used in advanced portfolio management.

Stock ]
2.7 F-TEST
An F-test is any statistical test in which the test statistic has an F-distribution if the null
hypothesis is true. The name was coined by George W. Snedecor, in honour of Sir
Ronald A. Fisher. Fisher initially developed the statistic as the variance ratio in the
1920s. Examples include:
The hypothesis that the means of multiple normally distributed populations, all having
the same standard deviation, are equal. This is perhaps the most well-known of
hypotheses tested by means of an F-test, and the simplest problem in the analysis of
variance (ANOVA).
The hypothesis that the standard deviations of two normally distributed

populations are equal, and thus those they are of comparable origin.
Note that if it is equality of variances (or standard deviations) that is being tested, the
F-test is extremely non-robust to non-normality. That is, even if the data displays only
modest departures from the normal distribution, the test is unreliable and should not
be used.
The general formula for an F- test is: F = (between-group variability) / (within-group

variability)
In many cases, the F-test statistic can be calculated through a straightforward

process. In the case of regression: consider two models, 1 and 2, where model 1 is
nested within model 2. That is, model 1 has p1 parameters, and model 2 has p2

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parameters, where p2 > p1. (Any constant parameter in the model is included when
counting the parameters.
2.8 SPECULATION
Financial speculation, involves the buying, holding, selling, and short-selling of

stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any
valuable financial instrument to profit from fluctuations in its price as opposed to
buying it for use or for income via methods such as dividends or interest. Speculation
or agitates represents one of four market roles in Western financial markets, distinct
from hedging, long- or short-term investing, and arbitrage. Another service provided by
speculators to a market is that by risking their own capital in the hope of profit, they
add liquidity to the market and make it easier for others to offset risk, including those
who may be classified as hedgers and arbitrageurs.
If a certain market - for example, pork bellies - had no speculators, then only
producers (hog farmers) and consumers (butchers, etc.) would participate in that
market. With fewer players in the market, there would be a larger spread between the
current bid and ask price of pork bellies. Any new entrant in the market who wants to
either buy or sell pork bellies would be forced to accept an illiquid market and market
prices that have a large bid-ask spread or might even find it difficult to find a co-party
to buy or sell to. A speculator (e.g. a pork dealer) may exploit the difference in the

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spread and, in competition with other speculators, reduce the spread, thus creating a
more efficient market.
Auctions are a method of squeezing out speculators from a transaction, but they may
have their own perverse effects; see winner's curse. The winner's curse is however
not very significant to markets with high liquidity for both buyers and sellers, as the
auction for selling the product and the auction for buying the product occur
simultaneously, and the two prices are separated only by a relatively small spread.
This mechanism prevents the winner's curse phenomenon from causing mispricing to
any degree greater than the spread.
Speculative purchasing can also create inflationary pressure, causing particular prices
to increase above their true value (real value - adjusted for inflation) simply because
the speculative purchasing artificially increases the demand. Speculative selling can
also have the opposite effect, causing prices to artificially decrease below their true
value in a similar fashion. In various situations, price rises due to speculative
purchasing cause further speculative purchasing in the hope that the price will
continue to rise. This creates a positive feedback loop in which prices rise dramatically
above the underlying value or worth of the items. This is known as an economic
bubble. Such a period of increasing speculative purchasing is typically followed by one
of speculative selling in which the price falls significantly, in extreme cases this may
lead to crashes. Overall, the participation of speculators in financial markets tends to
be accompanied by significant increase in short-term market volatility. This is not
necessarily a bad thing, as heightened level of volatility implies that the market will be
able to correct perceived mispricing more rapidly and in a more drastic manner.

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CHAPTER-3

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3.1 LITERATURE REVIEW
There are numerous studies done to estimate the required rate of return on the stock.
Most of the research studies are based on the theories proposed by:
¾ The Risk/Return Trade Off

¾ The Capital Asset Pricing Model
¾ Gordon’s Model
¾ Dividend Discount Model
¾ Sharpe’s Model
THE RISK / RETURN TRADEOFF

The risk/return tradeoff could easily be called the "ability-to-sleep at- night test." While
some people can handle the equivalent of financial skydiving without batting an eye,
others are terrified to climb the financial ladder without a secure harness. Deciding
what amount of risk you can take while remaining comfortable with your investments is
very important.
In the investing world, the dictionary definition of risk is the chance that an
investment's actual return will be different than expected. Technically, this is
measured in statistics by standard deviation. Risk means you have the possibility of
losing some or even all of our original investment.

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Low levels of uncertainty (low risk) are associated with low potential returns.
High levels of uncertainty (high risk) are associated with high potential returns. The
risk/return tradeoff is the balance between the desire for the lowest possible risk and
the highest possible return. This is demonstrated graphically in the chart below.
A higher standard deviation means a higher risk and higher possible return. A
common misconception is that higher risk equals greater return. The risk/return
tradeoff tells us that the higher risk gives us the possibility of higher returns. There are

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no guarantees. Just as risk means higher potential returns, it also means higher
potential losses.
On the lower end of the scale, the risk-free rate of return is represented by the return
on Treasury Bills rate because their chance of default is next to nothing. If the risk-free
rate is currently 6%, this means, with virtually no risk, we can earn 6% per year on our
money.
THE CAPITAL ASSET PRICING MODEL [CAP-M]
The Capital Asset Pricing Model (CAPM) is an equilibrium model which describes the
pricing of assets, as well as derivatives. The model concludes that the expected return
of an asset (or derivative) equals the riskless return plus a measure of the assets non-
diversable risk (beta) times the market-wide risk premium (excess expected return of
the market portfolio over the riskless return). That is:
Expected Security Return = Risk free Return + Beta X (Expected Market Risk
Premium)
It concludes that only the risk which cannot be diversified away by holding a well-
diversified portfolio (e.g. the market portfolio) will affect the market price of the asset.

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This risk is called systematic risk, while risk that can be diversified away is called
diversifiable risk (or nonsystematic risk).
DIVIDEND DISCOUNT MODEL
In the strictest sense, the only cash flow you receive from a firm when you buy publicly
traded stock is the dividend. The simplest model for valuing equity is the dividend
discount model -- the value of a stock is the present value of expected dividends on it.
While many analysts have turned away from the dividend discount model and viewed
it as outmoded, much of the intuition that drives discounted cash flow valuation is
embedded in the model. In fact, there are specific companies where the dividend
discount model remains a useful took for estimating value.
Any stock is ultimately worth no more than what it will provide investors in current and
future dividends. Financial theory says that the value of a stock is worth all of the
future cash flows expected to be generated by the firm, discounted by an appropriate
risk-adjusted rate. According to the DDM, dividends are the cash flows that are
returned to the shareholder.
To value a company using the DDM, you calculate the value of dividend payments
that you think a stock will throw-off in the years ahead. Here is what the model says:
ZERO GROWTH MODEL
P0 = Div
R
where
Stock ]
P = the price at time 0

r = discount rate
Div = annual dividend
Therefore the required rate of return on Equity is:
R = Div
P
MULTI-STAGE MODELS
To get around the problem posed by un-steady dividends, multistage models take the
DDM a step closer to reality by assuming that the company will experience differing
growth phases. Stock analysts build complex forecast models with many phases of
differing growth to better reflect real prospects. For example, a multi-stage DDM may
predict that a company will have a dividend that grows at 5% for seven years, 3% for
the following three years and then at 2% in perpetuity. However, such an approach
brings even more assumptions into the model although it doesn't assume that a
dividend will grow at a constant rate, it must guess when and by how much a dividend
will change over time.
Another sticking point with the DDM is that no one really knows for certain the
appropriate expected rate of return to use. It’s not always wise simply to use the long-
term interest rate because the appropriateness of this can change.
GORDON’S MODEL

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The Gordon’s Model works on the similar lines as that of the Dividend Discount Model.
A model for determining the intrinsic value of a stock, based on a future series of
dividends that grow at a constant rate. Given a dividend per share that is payable in
one year, and the assumption that the dividend grows at a constant rate forever (in
perpetuity), the model solves for the present value of the infinite series of future
dividends.
Stock Value ( P ) = D
k-G
where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
Therefore the expected rate of return on equity is given by:
K=D+G
P
Because the model simplistically assumes a constant growth rate, it is generally only
used for mature companies (or broad market indices) with low to moderate growth
rates.
SHARPE’S MODEL

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The limitation of Markowitz Model was that it related each security to every other
security in the portfolio, demanding the sophistication and volume of work well beyond
the capacity of all but a few analysts. Consequently, its application remained severely
limited until William F. Sharpe published a model simplifying the mathematical
calculations required by Markowitz Model.
Sharpe assumed that, for the sake of simplicity, the return on security could
be regarded as being linearly related to a single index. Theoretically, the market index
should consist of all the securities trading on the market. However, a popular average
can be treated as a surrogate for marker index. Acceptance of the idea of the market
index, Sharpe argued, would obviate the need for calculating thousands of
covariances between securities, because any movements in securities could be
attributed to movements in single underlying factor being measured by the market
index. The simplification of Markovitz Model has come to be known as Market Model
or Single-Index Model [SIM].
3.2 PROBLEM STATEMENT:

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Identification Of Required Rate Of Return And Risk Of A Particular Stock Based Upon
Different Risk Elements Prevailing In The Market And Other Economic Factors, For
Equity With Low Value And High Volatility Speculation stocks.
3.3 RESEARCH OBJECTIVE
¾ To Study the Risk and Return of Stock.
¾ To Test the Variability between Variables, Such as variance of returns

covariance etc.

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CHAPTER-4
RESEARCH METHODOLOGY

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4.1 TYPE OF RESEARCH
Type of research is Descriptive research, which is Quantitative in nature.
4.2 SAMPLING TECHNIQUE
Technique use for selection of samples is simple random sampling technique.
4.3 SAMPLE SIZE
IT industry is selected by simple random sampling. In that industry five stocks are
selected from large cap and five stocks are selected from lower and medium
capitalization.
4.4 DATA COLLECTION
Secondary Data
Historical stock prices.
4.5 SOURCES OF DATA

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The data relating to the study is taken from two databases namely prowess and
capital line plus.
¾ Large Volumes of Data

¾ Time Constrain
4.6 HYPOTHESIS
¾ Null Hypothesis: There is no difference in volatility with respect to low priced

high speculative share.
H0- denotes null hypothesis.
Mathematically it is represented as:
ρ= F(X1, X2, X3, X4, X5)

where
The Dependent Variable:
ρ: required rate of return
The Independent Variables:
X1: Variance
X2: Skewness
X3: Correlation coefficient
X4: Debt-equity Ratio
X5: Dividends-Earnings Ratio

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¾ Alternative Hypothesis: There is difference in volatility with respect to low

priced and high speculative share.
Ha- denotes alternative hypothesis.
4.7 LIMITATIONS OF THE RESEARCH
¾ The sample companies consisted of the stocks in the index, but since not all
the information was available it acts as constraints to the result.
¾ Ideally, the research should have been done throughout the cross section of
the stocks in India, but this would have been beyond my scope of study due to
limited resources.
¾ As the sample size will be small there is a very limited chance to carry out an
in-depth study.

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CHAPTER-5
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ANALYSIS AND INTERPERTATION
5.1 SMALL AND MEDIUM STOCKS
3i INFOTECH LTD:
Avg.
DATE Price RETURN BSE_SENSEX RETURN
200601 92.39 5.842594 9919.89 -4.34272
200602 87.29 -2.61073 10370.24 -8.06492
200603 89.63 -3.39513 11279.96 -6.33254

Stock ]
200604 92.78 -1.8824 12042.56 15.80932
200605 94.56 27.04555 10398.61 -1.98544
200606 74.43 1.819425 10609.25 -1.25309
200607 73.1 -8.30406 10743.88 -8.16451
200608 79.72 -4.75508 11699.05 -6.06508
200609 83.7 -7.18563 12454.42 -3.91517
200610 90.18 -1.65758 12961.9 -5.3621
200611 91.7 2.91807 13696.31 -0.65715
200612 89.1 -29.6264 13786.91 -2.15749
200701 126.61 -10.2248 14090.92 8.910357
200702 141.03 19.0428 12938.09 -1.02516
200703 118.47 -10.0251 13072.1 -5.76881
200704 131.67 -14.633 13872.37 -4.62093
200705 154.24 1.087954 14544.46 -0.72387
200706 152.58 0.712871 14650.51 -5.7905
200707 151.5 6.787904 15550.99 1.517045

Stock ]
200708 141.87 -1.57486 15318.6 -11.4076
200709 144.14 0.607245 17291.1 -12.8384
200710 143.27 9.659395 19837.99 2.452075
200711 130.65 -7.70046 19363.19 -4.55366
200712 141.55 4.914023 20286.99 14.94885
200801 134.92 8.736299 17648.71 0.398152
200802 124.08 17578.72
MEAN -0.57604
SD 10.99276
CORELATION 0.144772
BETA=SLOPE 0.230425
ALPHA -0.10604
INTERPRETATION:-

Stock ]
3i InfoTech technologies Pvt. Ltd. has a negative monthly average return of 0.57604%
with an average monthly risk factor of 10.99%. There is a correlation of 0.145 and
Beta of 0.230425.so it is clear that 3i InfoTech is not moving with sensex. It has an
alpha value of -0.10604. It means that the company stock has lower market Expected
return than the Investors expected return.
TATA ELXSI LTD:

Stock ]
Avg.
200601 205.55 7.640344 9919.89 -4.34272
200602 190.96 -0.56238 10370.24 -8.06492
200603 192.04 -8.13241 11279.96 -6.33254
200604 209.04 -6.41536 12042.56 15.80932
200605 223.37 26.36909 10398.61 -1.98544
200606 176.76 5.509461 10609.25 -1.25309
200607 167.53 -15.1833 10743.88 -8.16451
200608 197.52 -10.7778 11699.05 -6.06508
200609 221.38 -1.34581 12454.42 -3.91517
200610 224.4 -8.29212 12961.9 -5.3621
200611 244.69 -3.57424 13696.31 -0.65715
200612 253.76 -10.9677 13786.91 -2.15749
200701 285.02 -0.67259 14090.92 8.910357
200702 286.95 2.537073 12938.09 -1.02516
200703 279.85 -9.41314 13072.1 -5.76881

Stock ]
200704 308.93 -4.76293 13872.37 -4.62093
200705 324.38 -3.70194 14544.46 -0.72387
200706 336.85 3.630211 14650.51 -5.7905
200707 325.05 8.505525 15550.99 1.517045
200708 299.57 -2.43609 15318.6 -11.4076
200709 307.05 5.967007 17291.1 -12.8384
200710 289.76 19.19375 19837.99 2.452075
200711 243.1 -7.78043 19363.19 -4.55366
200712 263.61 7.141115 20286.99 14.94885
200801 246.04 19.85581 17648.71 0.398152
200802 205.28 17578.72
MEAN 0.493246
SD 10.34619
CORELATION 0.211676
BETA=SLOPE 0.317096

Stock ]
ALPHA 1.140037
INTERPRETATION:-
Tata Elxsi Pvt. Ltd. has a monthly average return of 0.49% with an average monthly
risk factor of 10.99%.There is a correlation of 0.2116 and Beta of 0.317.so it is clear
that Tata Elxsi is moving with sensex only up to the extent of 30%. It has an alpha
value of 1.14. It means that the company stocks has better market Expected return
than the Investors expected return.

Stock ]
ZENITH INFOTECH LTD:

Avg.
200601 117.3 1.444262 9919.89 -4.34272
200602 115.63 -22.4948 10370.24 -8.06492
200603 149.19 -23.3744 11279.96 -6.33254
200604 194.7 -19.6882 12042.56 15.80932
200605 242.43 53.45613 10398.61 -1.98544
200606 157.98 -17.1665 10609.25 -1.25309
200607 190.72 -21.9736 10743.88 -8.16451
200608 244.43 -18.9206 11699.05 -6.06508

Stock ]
200609 301.47 -5.60774 12454.42 -3.91517
200610 319.38 9.601922 12961.9 -5.3621
200611 291.4 0.313264 13696.31 -0.65715
200612 290.49 -1.60219 13786.91 -2.15749
200701 295.22 4.524855 14090.92 8.910357
200702 282.44 3.454086 12938.09 -1.02516
200703 273.01 -3.95427 13072.1 -5.76881
200704 284.25 -19.0425 13872.37 -4.62093
200705 351.11 -10.3144 14544.46 -0.72387
200706 391.49 -27.1091 14650.51 -5.7905
200707 537.09 3.567365 15550.99 1.517045
200708 518.59 0.189332 15318.6 -11.4076
200709 517.61 22.99156 17291.1 -12.8384
200710 420.85 29.41665 19837.99 2.452075
200711 325.19 -12.9414 19363.19 -4.55366
200712 373.53 -10.7242 20286.99 14.94885

Stock ]
200801 418.4 3.906425 17648.71 0.398152
200802 402.67 17578.72
MEAN -3.28192
SD 18.53893
CORELATION 0.006577
BETA=SLOPE 0.017656
ALPHA -3.24591
INTERPRETATION:-
Zenith InfoTech has a huge negative monthly return of 3.28%.and also has a very
high risk factor of 18.54% and it has a correlation and beta of 0.0065 and 0.017
respectively. So the company stock is not at all moving with sensex and it has an
alpha of -3.25 therefore the company stocks has lower market Expected return than
the Investors expected return.

Stock ]
SUBEX LTD:
Avg.
200601 394.36 -3.12707 9919.89 -4.34272

Stock ]
200602 407.09 -3.49887 10370.24 -8.06492
200603 421.85 -16.2098 11279.96 -6.33254
200604 503.46 -2.1819 12042.56 15.80932
200605 514.69 18.83312 10398.61 -1.98544
200606 433.12 3.666826 10609.25 -1.25309
200607 417.8 -2.69465 10743.88 -8.16451
200608 429.37 -4.07926 11699.05 -6.06508
200609 447.63 -11.7866 12454.42 -3.91517
200610 507.44 -16.1755 12961.9 -5.3621
200611 605.36 -5.93719 13696.31 -0.65715
200612 643.57 -9.34102 13786.91 -2.15749
200701 709.88 5.541101 14090.92 8.910357
200702 672.61 16.30211 12938.09 -1.02516
200703 578.33 1.978452 13072.1 -5.76881
200704 567.11 -6.61628 13872.37 -4.62093
200705 607.29 -0.33152 14544.46 -0.72387

Stock ]
200706 609.31 0.549523 14650.51 -5.7905
200707 605.98 12.32044 15550.99 1.517045
200708 539.51 8.838007 15318.6 -11.4076
200709 495.7 27.63602 17291.1 -12.8384
200710 388.37 32.29213 19837.99 2.452075
200711 293.57 -11.3778 19363.19 -4.55366
200712 331.26 3.164123 20286.99 14.94885
200801 321.1 14.9701 17648.71 0.398152
200802 279.29 17578.72
MEAN 2.109379
SD 12.64578
CORELATION 0.083681
BETA=SLOPE 0.153219
ALPHA 2.421905
INTERPRETATION:-
Subex Ltd. has very good monthly return of 2.11%.with a risk factor of 12.65% but it
has a standard deviation and correlation of 0.094 and 0.15 respectively. So the stock

Stock ]
moves only 15% with the sensex. It has alpha of 2.42. Therefore the company stocks
have better market Expected return than the Investors expected return.
DATANET SYSTEMS LTD:

Avg.
Price RETURN BSE_SENSEX RETURN
DATE 7.42 25.76271 9919.89 -4.34272
200601 5.9 32.287 10370.24 -8.06492
200602 4.46 -3.2538 11279.96 -6.33254
200603 4.61 -2.12314 12042.56 15.80932
200604 4.71 -1.875 10398.61 -1.98544
200605 4.8 -15.937 10609.25 -1.25309
200606 5.71 9.807692 10743.88 -8.16451
200607 5.2 25.90799 11699.05 -6.06508
200608 4.13 0.242718 12454.42 -3.91517
200609 4.12 4.040404 12961.9 -5.3621
200610 3.96 8.196721 13696.31 -0.65715
200611 3.66 -22.7848 13786.91 -2.15749
200612 4.74 -25.1185 14090.92 8.910357

Stock ]
200701 6.33 14.67391 12938.09 -1.02516
200702 5.52 -4.99139 13072.1 -5.76881
200703 5.81 11.30268 13872.37 -4.62093
200704 5.22 -5.43478 14544.46 -0.72387
200705 5.52 -2.8169 14650.51 -5.7905
200706 5.68 -11.8012 15550.99 1.517045
200707 6.44 6.446281 15318.6 -11.4076
200708 6.05 12.66294 17291.1 -12.8384
200709 5.37 22.8833 19837.99 2.452075
200710 4.37 -28.4779 19363.19 -4.55366
200711 6.11 -29.036 20286.99 14.94885
200712 8.61 43.26123 17648.71 0.398152
200801 6.01 17578.72
MEAN 2.553007
SD 18.94376
CORELATION -0.37404

Stock ]
BETA=SLOPE -1.02593
ALPHA 0.460374
INTERPRETATION:-
Data net systems Ltd. has a good monthly return of 2.55% with a risk factor of 18.94%
but the company stock moves against sensex because it has a correlation and beta of
-0.37 and -1.025 respectively and the stock has an alpha of 0.46 .So the company
stocks have better market Expected return than the Investors expected return.
5.2 LARGE STOCKS
HCL TECHNOLOGIES LTD:
Avg.
200601 293.44 -3.80278 9919.89 -4.34272
200602 305.04 -1.39006 10370.24 -8.06492
200603 309.34 1.1874 11279.96 -6.33254
200604 305.71 11.912 12042.56 15.80932
200605 273.17 18.96094 10398.61 -1.98544
200606 229.63 -12.8473 10609.25 -1.25309
200607 263.48 -7.28085 10743.88 -8.16451

Stock ]
200608 284.17 0.876819 11699.05 -6.06508
200609 281.7 -4.1315 12454.42 -3.91517
200610 293.84 -5.70869 12961.9 -5.3621
200611 311.63 0.841342 13696.31 -0.65715
200612 309.03 -2.88794 13786.91 -2.15749
200701 318.22 -3.97127 14090.92 8.910357
200702 331.38 8.184519 12938.09 -1.02516
200703 306.31 -0.70667 13072.1 -5.76881
200704 308.49 -9.07242 13872.37 -4.62093
200705 339.27 0.292657 14544.46 -0.72387
200706 338.28 2.939565 14650.51 -5.7905
200707 328.62 9.510797 15550.99 1.517045
200708 300.08 2.767123 15318.6 -11.4076
200709 292 -5.25633 17291.1 -12.8384
200710 308.2 2.269711 19837.99 2.452075
200711 301.36 -4.12929 19363.19 -4.55366

Stock ]
200712 314.34 14.75613 20286.99 14.94885
200801 273.92 0.917364 17648.71 0.398152
200802 271.43 17578.72
MEAN 0.569252
SD 7.442767
CORELATION 0.488982
BETA=SLOPE 0.526945
ALPHA 1.644079
INTERPRETATION:-
HCL technologies Ltd. has a monthly return of 0.569%.with a risk factor of 7.44%.it
has correlation and beta of 0.49 and 0.53 respectively . So the company stock is
moving 50% along sensex .it has an alpha of 1.64 .Therefore the company stocks
have better market Expected return than the Investors expected return.

Stock ]
INFOSYS TECHNOLOGIES LTD:
Avg.
200601 1,445.01 2.295799 9919.89 -4.34272
200602 1,412.58 -2.91146 10370.24 -8.06492

Stock ]
200603 1,454.94 -8.59781 11279.96 -6.33254
200604 1,591.80 3.364979 12042.56 15.80932
200605 1,539.98 8.201651 10398.61 -1.98544
200606 1,423.25 -12.0337 10609.25 -1.25309
200607 1,617.95 -7.02238 10743.88 -8.16451
200608 1,740.15 -4.37475 11699.05 -6.06508
200609 1,819.76 -9.3063 12454.42 -3.91517
200610 2,006.49 -7.54567 12961.9 -5.3621
200611 2,170.25 -1.57686 13696.31 -0.65715
200612 2,205.02 -1.26187 13786.91 -2.15749
200701 2,233.20 -2.56247 14090.92 8.910357
200702 2,291.93 10.41189 12938.09 -1.02516
200703 2,075.80 2.123347 13072.1 -5.76881
200704 2,032.64 2.718245 13872.37 -4.62093
200705 1,978.85 1.13666 14544.46 -0.72387
200706 1,956.61 -0.43761 14650.51 -5.7905

Stock ]
200707 1,965.21 4.621486 15550.99 1.517045
200708 1,878.40 1.808643 15318.6 -11.4076
200709 1,845.03 -4.05859 17291.1 -12.8384
200710 1,923.08 15.53153 19837.99 2.452075
200711 1,664.55 -1.88965 19363.19 -4.55366
200712 1,696.61 9.646878 20286.99 14.94885
200801 1,547.34 -1.77864 17648.71 0.398152
200802 1,575.36 17578.72
MEAN -0.13987
SD 6.573743
CORELATION 0.412437
BETA=SLOPE 0.392562
ALPHA 0.660853
INTERPRETATION:-
Infosys technologies has a monthly negative return of 0.14% with a risk factor of
6.57%.it has a correlation and Beta of 0.41and 0.39.So the stock is moving 40% along
the sensex. It has an alpha of 0.66. So the company stocks have better market
Expected return than the Investors expected return.

Stock ]
TATA CONSULTANCY SERVICES LTD:
Avg.
200601 833.48 0.636312 9919.89 -4.34272
200602 828.21 -9.43675 10370.24 -8.06492
200603 914.51 -5.56485 11279.96 -6.33254
200604 968.4 0.058895 12042.56 15.80932
200605 967.83 16.06903 10398.61 -1.98544
200606 833.84 -8.83906 10609.25 -1.25309
200607 914.69 -5.20561 10743.88 -8.16451
200608 964.92 -4.52953 11699.05 -6.06508
200609 1,010.70 -4.94686 12454.42 -3.91517
200610 1,063.30 -4.10613 12961.9 -5.3621
200611 1,108.83 -5.35844 13696.31 -0.65715
200612 1,171.61 -9.07532 13786.91 -2.15749
200701 1,288.55 0.481137 14090.92 8.910357
200702 1,282.38 3.812901 12938.09 -1.02516

Stock ]
200703 1,235.28 0.568265 13072.1 -5.76881
200704 1,228.30 -1.08156 13872.37 -4.62093
200705 1,241.73 5.507643 14544.46 -0.72387
200706 1,176.91 1.88903 14650.51 -5.7905
200707 1,155.09 7.278587 15550.99 1.517045
200708 1,076.72 3.986711 15318.6 -11.4076
200709 1,035.44 -3.62352 17291.1 -12.8384
200710 1,074.37 9.227234 19837.99 2.452075
200711 983.61 -6.48317 19363.19 -4.55366
200712 1,051.80 12.94497 20286.99 14.94885
200801 931.25 4.050279 17648.71 0.398152
200802 895 17578.72
MEAN -0.06959
SD 6.769994
CORELATION 0.415376
BETA=SLOPE 0.407163

Stock ]
ALPHA 0.760911
INTERPRETATION:-
TCS Ltd. has a negative monthly return of 0.07% with a risk factor of 6.77%. The
Correlation and Beta of the stocks are 0.41 and 0.40.So the company stocks move
40% along the sensex. The Company has an alpha value of 0.76.Therefore the
market expected return is greater than the investors expected return.
WIPRO LTD:
Avg.
200601 481.12 -5.97065 9919.89 -4.34272
200602 511.67 -3.34177 10370.24 -8.06492
200603 529.36 -2.71264 11279.96 -6.33254
200604 544.12 6.889304 12042.56 15.80932
200605 509.05 13.57399 10398.61 -1.98544
200606 448.21 -7.55316 10609.25 -1.25309
200607 484.83 -5.00794 10743.88 -8.16451
200608 510.39 -1.02391 11699.05 -6.06508
200609 515.67 -4.97365 12454.42 -3.91517

Stock ]
200610 542.66 -2.61647 12961.9 -5.3621
200611 557.24 -4.0102 13696.31 -0.65715
200612 580.52 -6.07232 13786.91 -2.15749
200701 618.05 -3.0981 14090.92 8.910357
200702 637.81 11.58913 12938.09 -1.02516
200703 571.57 2.155457 13072.1 -5.76881
200704 559.51 2.756657 13872.37 -4.62093
200705 544.5 3.101568 14544.46 -0.72387
200706 528.12 3.96063 14650.51 -5.7905
200707 508 8.475155 15550.99 1.517045
200708 468.31 2.708571 15318.6 -11.4076
200709 455.96 -6.61724 17291.1 -12.8384
200710 488.27 5.798358 19837.99 2.452075
200711 461.51 -8.86993 19363.19 -4.55366
200712 506.43 10.33333 20286.99 14.94885
200801 459 6.898319 17648.71 0.398152

Stock ]
200802 429.38 17578.72
MEAN 0.6549
SD 6.499857
CORELATION 0.44563
BETA=SLOPE 0.419388
ALPHA 1.51034
INTERPRETATION:-
Wipro Ltd. has an average monthly return of 0.65% with a risk factor of 6.49%. The
Correlation and Beta of the stocks are 0.44 and 0.41.So the company stocks move
40% along the sensex. The Company has an alpha value of 1.51.Therefore the
market expected return is greater than the investors expected return.
SATYAM COMPUTER SERVICES LTD:
Avg.
200601 369.98 -1.48578 9919.89 -4.34272
200602 375.56 -7.68626 10370.24 -8.06492
200603 406.83 -0.02212 11279.96 -6.33254
200604 406.92 11.07411 12042.56 15.80932

Stock ]
200605 366.35 12.26366 10398.61 -1.98544
200606 326.33 -8.98873 10609.25 -1.25309
200607 358.56 -8.32247 10743.88 -8.16451
200608 391.11 -4.31326 11699.05 -6.06508
200609 408.74 -3.88016 12454.42 -3.91517
200610 425.24 -3.33038 12961.9 -5.3621
200611 439.89 -5.6779 13696.31 -0.65715
200612 466.37 -4.51847 13786.91 -2.15749
200701 488.44 4.080632 14090.92 8.910357
200702 469.29 5.534317 12938.09 -1.02516
200703 444.68 -3.72808 13072.1 -5.76881
200704 461.9 0.423959 13872.37 -4.62093
200705 459.95 -2.85962 14544.46 -0.72387
200706 473.49 -2.14318 14650.51 -5.7905
200707 483.86 6.774649 15550.99 1.517045
200708 453.16 4.489382 15318.6 -11.4076

Stock ]
200709 433.69 -5.62314 17291.1 -12.8384
200710 459.53 6.530508 19837.99 2.452075
200711 431.36 -0.83222 19363.19 -4.55366
200712 434.98 8.17169 20286.99 14.94885
200801 402.12 -6.64871 17648.71 0.398152
200802 430.76 17578.72
MEAN -0.4287
SD 6.134987
CORELATION 0.574904
BETA=SLOPE 0.510677
ALPHA 0.612943
INTERPRETATION:-Satyam Computers Ltd. has a negative monthly return of 0.43%

with a risk factor of 6.13% The Correlation and Beta of the stocks are 0.57 and
0.51.So the company stocks move 50% along the sensex. The Company has an alpha
value of 0.61.Therefore the market expected return is greater than the investors
expected return.
5.3 F-TEST
HYPOTHESIS:-

Stock ]
NULL HYPOTHESIS, Ho –
There is no difference between the returns of small and medium capitalization stock
and large capitalization stock.
There is no difference between the risk of small and medium capitalization stocks and
large capitalization stock.
ALTERNATIVE HYPOTHESIS: - Ha
There is difference between the returns of small and medium capitalization stock and
There is difference between the risk of small and medium capitalization stocks and
F-test
Variables
N1= 5
N2=5
N1-1=4
N2-1=4

Stock ]
MEDIUN AND
SMALL STOCKS MEAN LARGE STOCKS MEAN
HCL
TECHNOLOGIES
3I INFOTECH LTD -0.57604 LTD 0.569252
INFOSYS
TECHNOLOGIES
TATA ELXSI LTD 0.493246 LTD -0.13987
TATA
ZENITH INFOTECH CONSULTANCY
LTD -3.28192 SERVICES LTD -0.06959
SUBEX LTD 2.109379 WIPRO LTD 0.6549
Datanet Systems Satyam Computer

Ltd 2.553007 Services Ltd -0.4287
F-Test Two-Sample for Variances
Variable Variable
1 2
Mean 0.259534 0.117197708
Variance 5.494162 0.223114327
Observations 5 5
Df 4 4
F 24.62487
P(F<=f) one-
tail 0.00445

Stock ]
Interpretation :P (F<=f) one tail = 0.0045 which is less than 0.05 .So null hypothesis
is rejected and alternative hypothesis is accepted. Therefore there is a variation
between the means of between the returns of small and medium capitalization stock
and large capitalization stock.
MEDIUN AND STANDARD STANDARD

SMALL STOCKS DEVIATION LARGE STOCKS DEVIATION
HCL
TECHNOLOGIES
3I INFOTECH LTD 10.99276 LTD 7.442767
INFOSYS
TECHNOLOGIES
TATA ELXSI LTD 10.34619 LTD 6.573743
TATA
ZENITH INFOTECH CONSULTANCY
LTD 18.53893 SERVICES LTD 6.769994
SUBEX LTD 12.64578 WIPRO LTD 6.499857
Datanet Systems Satyam Computer

Ltd 18.94376 Services Ltd 6.134987
F-Test Two-Sample for Variances
Variable Variable
1 2
Mean 14.29348 6.684269
Variance 17.20993 0.232651
Observations 5 5

Stock ]
df 4 4
F 73.97333
P(F<=f) one-
tail 0.000529
INTERPRETATION -P (F<=f) one tail = 0.000529 which is less than 0.05 .So null
hypothesis is rejected and alternative hypothesis is accepted. Therefore there is a
variation between the risks of between the returns of small and medium capitalization
stock and large capitalization stock.
5.4 SMALL AND MEDIUM CAPITALIZATION STOCKS
Company Average monthly return Average monthly Risk
3i InfoTech Ltd. -0.57 10.99
Tata Elxsi Ltd. 0.49 10.35
Zenith info Tech Ltd. -3.28 18.54
Subex Ltd. 2.11 12.65
Data net system Ltd. 2.55 18.94
Average 0.26 14.29
Return per unit of risk = Average monthly return/Average monthly risk.

Stock ]
= 0.26/14.29
= 0.0181945
5.5 LARGE CAPITALIZATION STOCKS
Company Average monthly return Average monthly Risk
HCL technologies Ltd. 0.57 7.44
Infosys technologies Ltd. -0.14 6.57
TCS Ltd. -0.07 6.77
Wipro Ltd. 0.65 6.499
Satyam computers Ltd. -0.43 6.13
Average 0.116 6.6818
Return per unit of risk = Average monthly return/Average monthly risk.

Stock ]
= 0.116/6.6818
= 0.01736

Stock ]
CHAPTER- 6
FINDINGS:
• Calculation from the above table (5.4) we can see that DATANET SYSTEMS
LTD. has got the highest return among the given medium and small stocks.
We can also make out that lowest return among the given medium and small
stocks is from ZENITH INFOTECH LTD.
Again, from the table (5.4), return is highest of WIPRO LTD. among the given
large stocks.

Stock ]
The lowest return among the given large stocks is from SATYAM COMPUTER
SERVICES LTD.
• Calculation from the above table (5.5) we can see that DATANET SYSTEMS
LTD. has got the highest risk among the given medium and small stocks. We
can also make out that lowest risk among the given medium and small stocks is
from TATA ELXSI LTD.
Again, from the table (5.5), risk is highest of HCL TECHNOLOGIES LTD. among
the given large stocks.
The lowest risk among the given large stocks is from SATYAM COMPUTER
SERVICES LTD.
CONCLUSION
When we compare the monthly average returns of “large capitalization and small
and medium Capitalization”, the small and medium capitalization has better return

Stock ]
than the large capitalization stocks. But at the same time the risk factor is also
proportionally high in small and medium capitalization stocks.
So after the calculation of return per unit of risk, small and medium capitalization
stocks have better return per unit of risk as compared to large capitalization stocks.
Therefore small and medium capitalization stocks are better investable stocks as
compared to large capitalization stocks .When only risk and return is taken in to
consideration keeping other factors constant.

Stock ]
SUGGESTIONS:
• Aggressive investors should invest to those stock which have got high risk, as
we know that the stock which have got high risk have high return.
• Non-aggressive investors should invest to those stocks which have got low risk.
DIRECTION FOR FURTHER RESEARCH
Each company has its own industry/sector risk. But, this research is done only on
individual companies without considering the sector/industry variable of the company.
Hence further research can be done considering the industry variables for that
particular company.

Stock ]
BIBLIOGRAPHY
BOOKS:
• V K Bhalla, Investment Management, Security Analysis and Portfolio
Management.
• Ashwath Damodaran, Damodaran on valuation, Stern School of Business,(UK)
• Ashwath Damodaran, The dark side of valuation: Valuing old tech, new tech
and new economy companies, Stern School of Business,(UK)
JOURNALS:
• The Journal of Finance
• Dutta S K, (2004), .The share Price and its Valuation, The Management
Accountant,
WEBSITIES:
• www.nseindia.com
• www.stern.nyu.edu
• www.investopedia.com
• www.valuepro.com

Stock ]
DATABASE:
• Prowess
• Capital line plus
Annexure:-
HCL Technologies Ltd

Industry :Computers - Software - Large
BSE Adjusted Monthly BSE_SENSEX

From
Go
28 Apr 2007 28 Apr 2008
To
Open - High - Low - Close - Avg.
No of Net Turnover - Market Avg. Avg.
Date Unit Unit Unit Unit Volume Turnover -In BSE_SENSEX
Trades In Thousand Cap Price Volume
Curr Curr Curr Curr Thousand
200804 250.00 278.40 226.10 261.40 10,732,133.00 37965 2,756,553.334 17,387.02 251.08 631,301.94 162,150.196 17125.98
200803 267.00 291.00 232.00 253.00 1,849,685.00 31516 488,970.258 16,828.30 265.79 102,760.28 27,165.014 15644.44
200802 252.10 300.00 241.20 277.60 4,513,835.00 32271 1,244,353.401 18,460.40 271.42 214,944.52 59,254.924 17578.72
200801 333.80 333.80 180.00 249.50 5,014,797.00 27294 1,329,977.830 16,573.04 274.20 218,034.65 57,825.123 17648.71
200712 321.50 336.00 280.10 331.40 1,162,070.00 18388 367,761.384 21,998.33 313.97 61,161.58 19,355.862 20286.99
200711 311.90 328.20 285.00 320.25 7,623,549.00 24142 2,281,228.388 21,258.20 301.48 346,524.95 103,692.199 19363.19
200710 300.30 332.00 260.25 311.05 6,390,071.00 49349 1,957,237.722 20,647.50 307.70 290,457.77 88,965.351 19837.99
200709 306.00 317.50 270.05 299.80 3,277,794.00 42890 946,957.854 19,900.72 291.94 163,889.70 47,347.893 17291.1
200708 311.00 334.00 266.85 303.40 2,911,804.00 46231 876,265.363 20,138.18 299.93 132,354.73 39,830.244 15318.6
200707 350.00 350.00 304.50 314.60 3,079,188.00 34521 1,001,565.675 20,880.00 328.59 139,963.09 45,525.713 15550.99
200706 345.50 365.75 323.20 344.00 2,947,317.00 40545 1,013,400.536 22,831.28 337.76 140,348.43 48,257.168 14650.51
200705 337.95 356.70 321.00 344.15 5,141,876.00 52831 1,749,021.655 22,841.24 338.87 244,851.24 83,286.745 14544.46
200704 285.00 341.00 271.05 334.10 5,493,658.00 57644 1,718,971.773 22,174.22 308.25 274,682.90 85,948.589 13872.37

Stock ]
3i Infotech Ltd
Industry :Computers - Software - Medium / Small
BSE Adjusted Monthly BSE_SENSEX

From
Go
28 Apr 2007 28 Apr 2008
To
Open - High - Low - Close - Avg.
No of Net Turnover - Market Avg. Avg.
Date Unit Unit Unit Unit Volume Turnover -In BSE_SENSEX
Trades In Thousand Cap Price Volume
Curr Curr Curr Curr Thousand
200804 100.00 128.00 93.00 119.15 2,653,970.00 29355 310,110.345 1,555.50 111.13 156,115.88 18,241.785 17125.98
200803 123.00 126.40 84.00 97.20 1,721,612.00 18603 170,753.742 1,268.65 101.87 95,645.11 9,486.319 15644.44
200802 119.75 135.50 111.25 126.60 1,937,833.00 23079 241,389.294 1,651.12 123.94 92,277.76 11,494.728 17578.72
200801 148.00 159.90 85.00 120.95 6,153,028.00 53102 871,718.045 1,577.31 135.13 267,522.96 37,900.785 17648.71
200712 137.40 150.00 135.05 145.75 3,884,161.00 34933 553,631.049 1,900.00 141.52 204,429.53 29,138.476 20286.99
200711 139.35 139.70 121.25 134.70 3,446,847.00 33157 455,320.286 1,754.74 130.57 156,674.86 20,696.377 19363.19
200710 152.10 156.90 120.00 135.90 8,007,798.00 71189 1,165,171.693 1,769.69 143.13 363,990.82 52,962.350 19837.99
200709 149.00 156.35 133.05 147.80 7,004,168.00 74601 1,030,063.520 1,919.77 144.07 350,208.40 51,503.176 17291.1
200708 292.89 309.99 128.00 146.80 2,676,300.00 43905 619,124.215 1,901.35 141.83 121,650.00 28,142.010 15318.6
200707 305.89 324.35 282.06 295.60 3,557,384.00 51568 1,094,266.630 1,912.83 151.36 161,699.27 49,739.392 15550.99
200706 312.66 317.00 291.25 304.25 5,498,691.00 77424 1,686,296.345 1,883.61 152.46 261,842.43 80,299.826 14650.51
200705 305.95 328.99 288.09 310.10 11,555,372.00 162523 3,606,347.897 1,893.16 154.16 550,255.81 171,730.852 14544.46
200704 238.99 312.00 224.90 302.70 8,171,407.00 116706 2,284,195.536 1,716.01 131.64 408,570.35 114,209.777 13872.37

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[Analysis of Risk and Return with respect to Low and High Speculative [2008]

High Speculative Stock”

Submitted in partial fulfillment of the requirements of

PROF. PRAVEEN BHAGAWAN

M.P.BIRLA INSTITUTE OF MANAGEMENT

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 1

# 43, Race Course Road, Bangalore-560001

I, YASHWANT SINGH hereby declare that this research project entitled

PRAVEEN BHAGAWAN, faculty member, M.P BIRLA INSTITUTE OF

MANAGEMENT in partial fulfillment of Master of Business Administration (MBA)

degree, diploma, fellowship or other similar title or prizes.

PLACE: BANGALORE YASHWANT SINGH

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 2

BHAGAWAN, of M. P. Birla Institute of Management, Bangalore as per the

the basis for the award of any other degree.

Place :Bangalore (Dr.Nagesh.S.Malavalli)

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 3

bearing registration number 06XQCM6089, under my guidance and supervision as

formed the basis for the award of any other degree.

Place: Bangalore (Prof. Praveen Bhagawan)

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 4

Date: Faculty (MPBIM)

I am very thankful to my guide Prof. PRAVEEN BHAGAWAN, faculty member, M.P

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 5

Place: Bangalore YASHWANT SINGH

Particulars Page No.

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 6

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 7

PARTICULARS PAGE NO.

SMALL AND MEDIUM STOCKS

• TATA ELXSI LTD. 42

• ZENITH INFOTECH LTD. 45

• DATANET SYSTEMS LTD. 50

• HCL TECHNOLOGIES LTD. 53

• INFOSYS TECHNOLOGIES LTD. 56

• SATYAM COMPUTER SERVICE LTD. 62

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 8

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 9

2.1 RESEARCH EXTRACT

When an investor buys stock or takes an equity position in a firm, he or she is

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 10

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 11

¾ The distribution variables: standard deviation, skewness and

¾ The financial risk variables: debt-equity ratio and dividend

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 12

Paradoxically, a probable loss can be uncertain and relative in an individual event

Qualitatively, risk is considered proportional to the expected losses which can be

Risk can be classified into the following categories:

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 13

The systematic risk is further sub-divided into-

Intangible events are related to market psychology. The market psychology is

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 14

PURCHASING POWER RISK:

A one percentage point increase in expected inflation is estimated to rise required

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 15

INTEREST RATE RISK:

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 16

Unsystematic risk is unique and peculiar to an industry or to a firm. Unsystematic risk

Unsystematic risk can be classified into two categories namely:

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 18

DIVERSIFIABLE AND NON-DIVERSIFIABLE RISK

THE COMPONENTS OF RISK

When an investor buys stock or takes an equity position in a firm, he or she is

[M.P.BIRLA INSTITUTE OF MANAGEMENT] Page 19

Risk & Return

Risk & Return