FINANCIAL MANAGEMENT PROJECT REPORT ON TOPIC: RISK AND RETURNS

Annual data of stock prices

Binayak Tex Processors Ltd. V C U Data Mgmt. Ltd.
(Stock 1) (Stock 2)
Stock
Stock price
Year price Year
(Close)
(Close)
2018 644.4 2018 9.25
2019 613.7 2019 7.15
2020 500.85 2020 4.46
2021 840 2021 9.97
2022 885 2022 8.99

iii) BSE INDEX

(Market Index)
Market
Year index
(Close)
2018 36,068.33
2019 41,253.74
2020 47,751.33
2021 58,253.82
2022 61,624.15
Solution:
Stock 1
Stock
returns of
Year price X- X bar (X-Xbar)^2 (X-X bar)(Y-Ybar)
stock X
(Close)
2018 644.4 0 -0.09984 0.0099678 0.010660403
2019 613.7 -0.04764122 -0.14748 0.02175038 0.049229314
2020 500.85 -0.18388463 -0.28372 0.08049904 0.137038414
2021 840 0.677148847 0.57731 0.33328679 0.651580857
2022 885 0.053571429 -0.04627 0.00214068 0.009488111
X bar= 0.099838885 0.44764469 0.857997099

Stock 2
Stock
returns of
Year price Y- Y bar (Y- Ybar)^2 (R-R bar)(Y-Ybar)
stock y
(Close)
2018 9.25 0.00 -0.11 0.011401 0.012366079
2019 7.15 -0.23 -0.33 0.111425 -0.009330824
2020 4.46 -0.37622378 -0.48 0.233289 -0.020140986
2021 9.97 1.235426009 1.13 1.273851 0.117512347
2022 8.99 -0.09829488 -0.21 0.042054 0.011885351
Y Bar= 0.11 1.672019 0.112291967

BSE Market Index

Market returns of
Year index market index R -R bar (R- R bar)^2 (R-R bar)(X-Xbar)
(Close) R
2018 36,068.33 0 -0.11581 0.0134127 0.011562662
2019 41,253.74 0.14376629 0.027953 0.00078137 -0.004122523
2020 47,751.74 0.157512992 0.0417 0.00173887 -0.011831208
2021 58,253.82 0.219930834 0.104118 0.01084048 0.06010814
2022 61,624.15 0.057855948 -0.05796 0.00335904 0.002681535
R bar= 0.115813213 0.03013247 0.058398606

1. What is the arithmetic mean of the allotted stocks? Based on arithmetic returns, if you
have been given a chance to invest in either of the stocks, which stock you will prefer to
invest and why?
Ans:
Arithmetic return of stock 1: 0.099839
Arithmetic retrun of stock 2: 0.11
I would prefer investing on stocks of ADVANCE LIFESTYLE LTD as they are having
higher arithmetic returns

2. What is the geometric mean of both the stock returns?

Ans:
Geometric mean of stock return1: Couldn't find geometric mean as few stock returns are negative
Geometric mean of stock return2: Couldn't find geometric mean as few stock returns are negative

3. Define and calculate the variance and standard deviation for the given stocks, also write
an interpretations?
Ans:
Variance and standard deviation measure the volatility of asset returns. Greater the
volatility, the greater the uncertainty.
Variance= Σ(R-Rbar)^2/ N-1
Standard deviation of return risk refers to dispersion of returns around an expected value.
The most common statistical measure of risk of an asset is the standard deviation from the
mean/expected value of return.
Standard devistion= √ variance

Variance of stock 1= 0.111911172 Variance of market return= 0.007533

Standard deviation of stock 1= 0.693206 Standard deviation of market return=
0.114166
Variance of stock 2= 0.418004817
Standard deviation of stock 2= 1.06751
Expected Risk of stock 2 is more than stock 1
4. Calculate covariance between Stock-I and Stock-II; Stock-I and Market Index; Stock-II and
Market Index and write an interpretations from the findings.
Ans:

Covariance of stock 1 and stock 2= 0.21449927

Covariance of stock 1 and market index= 0.01459965
Covariance of stock 2 and market index= 0.02807299

5. Estimate Beta (β) value of Stock-I and market Index; Stock-II and market index. Which
stock is more sensitive to the market returns?
Ans:

Beta (x,r)= cov(x,r)/variance of market return= 1.938062385

Beta (y,r)= cov(y,r)/variance of market return= 3.726610129

As Beta value of Stock 2 is more, So Stock 2 is more sensitive towards the market returns.
re negative
re negative