CIIAPTER I INTRODUCTION AND METIIODOLOGY

An investment positive rate of return

IS

a c o n i ~ n ~ t ~ nof e nfunds t ~nade 111 expectation of soliie in the Iiopt. Investors sacrifice current consu~nptio~i They invest their savings in one

'

of attaining increased future consumption form or other to get h~gherreturn in future

The rate of return varies fro111 one for111of Ilirestlnerlt to tlie ot11i.r depend~ng 011tlie degree of r ~ s k ~nvolvedIn ~t That is, w ~ t h liigli rleprce risk the ~nvestor'sexpected return is more and vlce versa choice of investment depends on the investors' risk
111

However tlic Tlie

preference

~n\,est~nent objective is to select assets which have the maximum expected return In t h e ~ rr ~ s kclass, otherwise stated, the object~veis to nlaxuillst. tlie ~nvestor'scxpecled wealtli at some preferred l e ~ s of l risk "very invest~nrnt

~ n e d ~ u 1s m subject to varled magn~tudeof risk and ~ t s return expectat~o~i are contingent to the r ~ s k perceptton of the investors Thus the rtsk and return are so Inextricably ~nterwinedthat they can be regarded as two s ~ d e s of [lie s:liile COlll.

'Frsl~er E Doriald and Jordan J Ronald. Secur.rf\' A~rtrlj.\~.\ rrtrd Pvrrfolro A.la~~nget~re~lr, Prent~ceHall INC , New Jersey, 1987 1, 2 'Francis J Clarke. Itivesfniet~rAnnijsls o ~ r d Motrt~ge~iletrr. McCraw Hill Int Ed~tionNew York 1986 p 5

The baslc postulate underlying modern finance with same rlsk should have same expected return

theory 1s tl~atassets

Therefore IIIC prlces o f

assets In tlle capital market should adjust until equ~valentrlsk assets havr ident~cal expected return. Investor's perception of riskiness of an invest~l~e~rt and the returns that are l~kely to be generated from such investlnents, the certain~ty or otherwise of the return are the important factors that go into the

valuation of an investlnent

A~nongthe various Investlnents, Investlnent

111

equlty shares occupies an unlque place as ~t 1s expected to y ~ e l dhigher tl1;111 otlier Investments provid~ng f a ~ prlces r and free and actlvr ~ l ~ i ~ r k c t The security ~narket,
10

d~verse secur~t~e to s s u ~ the t varylng nutlon and wl11111s or a \'as1 III;IS\ of

III

savers about l i q u ~ d ~ t protitabiliry y and r ~ s k elelllent a

tlie~rI I I V C S ~ I ~ ~ C I pl.~y II.

v ~ t a l role In channel~sing savlrigs Into 111os1pruducl~ve clla~l~lel ol

~nvest~nent.'ESlicient security pr~cing therefore, l a ~ ~ t a i n o u to ~ ~ eflic~etlt ts allocat~on of economlc resources which 1s good f'ur orderly econwnlc

developli~ent and for every body for that niatter

If tllr securities ; I I C

efficiently priced Investors would obtain just return on tlleir irivest~nerits.cost

of funds would be just and no one make abnornial prolit

'

'Srlvastava R M , Esser~r~alsoJBus~ness Finance, Himalaya P u b l ~ s l ~ i ~ ~ p House, Bombay 1985, p 332. 'Yalaguresh B Yalawar "Rate of Return and E f f i c ~ e ~ ~ of cy bollihey Stock Excllange" In Stock Market Eflciency and Price Beltavruirr~Tltp 11rdi011 Experience Ed. by 0 P Gupta Anlnol Publ~cation1989 p 192

3
The vital funct~on o f capital market
I I I

Ilia

nod ern

econonly

underscores the rlnportance o f flow o f fund I n w h ~ c lthe ~ deliland for citp~tal funds, developed by business enterprises would be lnet by supply o f f ~ ~ n d s ~ n o b ~ l ~ sthrough ed savings However the security ~narket can perforni its
ensuring

funct~ononly i f it is able to build-up the ~nvestor's confidence by

that return from an Investment opportunrty coniniensurate to r ~ s k assoc~atctl w~th ~t The securlty is sad to be falrly p r ~ c e d ~f an Illvestor can expect

appropriate return for assum~ng r~sk

In llirs p e r ~ o d o f econolnlc l~beralisat~on it lias beconie all-llir-1110re

relevant to study security prlclng I n accordance to their ~nllerent r~sk and the cffic~encyw ~ t h w h ~ c h securlty market perforni 1111s funct~on Or~e o f the central Issue I n tlie theory of firlarice 1 s the r e l ; ~ t ~ n r ~ s l ~ ~ p between expected rlsk and return conjunction encompasses sclent~fic anatonly o f belleves that hlstory o f share prlces contalri i n Itsel securlty prlce b e l i a v l o l ~ ~ Technical analys~s strongly patterns arid glve the clue to the iuture. i e tlie study o f past returns can help investors to assess future return Effic~elit

Market Hqpotlies~s r~npllaslses on requ~red by rnd~v~duals Inveshng 1 1 1assets The core o f the rlsk retilrli unpred~ctab~l~ty o f securlty returns

"

Wllzrr;~~

'Paul M Van Arsdell, Corporatrotl Fulatlce, The Ronald Press Co Ltd.. New York 1986 p 887 'Turnball Stuart. "Market Value and Systeniat~cR ~ s k " . Jvrr~~rn r)/ l Flr~ance,September 1977 p 1125.

fundacnental analysls asserts that the share prlce 1s an oif-stloot of the lnteractlon of fundamental factors that influence the ~nvestor'sr ~ s k perceptloll Whatever may be the type of analysis,the b a s ~ cquest~ons arise before lnahng Investlilent In security are.-

How

IS

tlie prlce of the securlty fixed In the ~narkct?

Why there is w ~ d e varlatlon in the prices of securltles of different l i r ~ ~ i s " Does past prlceireturn ~nfluence the presentiluture prlceireturn" Whether the Intrinsic value of the firm Influence the share price" In the attempt to answer tliese questions d~ffererrt tlieorles have c(1111e

out with d~fferentpostulates about the bellavrour of share prlces Statenlent of the Probleni It 1s a well documented ('act that investment In equ~ty sllilrcs
(ICLLIIIICS

all Important place In the cap~tal market as 11I S expected to y~cldli~glrer rate of return when compared to other for111of Invesllnents However the nlarket

prlce of thc securlty 1s subject to Iilgli degree of fluctuat~ons The predlcuoll

ul' llic future prlces of shares is itnporlant for investors to reap Inore l ~ e ~ i e l i l \

from tlie~r investnients

The Guvernnient a l ~ d the soclety also evlnce kcrri

interest 1 1 1 the behav~ourof share p r ~ c e s and function~ngof cap~talfinarkel :IS it acts as the lndlcator of econolnlc growth and developnient
As a11

econo~nic paralneter, its active role has become irnperat~ve to the ador)t1(111 01 pollc~estuned towards the efficient function~ngof market ecollomy Tlie

coniplex~tiesassoc~atedw ~ t h the prlclng of shares and effic~erit I U I I ~ I I ~(11I I I I I ~

cap~tallriarket opens up the l l ~ q u i s l t l o to ~~ make enquiry Into 11s b e l ~ a v ~ o u r . which 1s of great Importance to polley makers. acade~lllc~ans, players tinanc~ng ~ n t e r ~ n e d ~ a t and i o n the investing publlc. Hence the present study makes an attelrlpt
111
$11

the s;t~dd11cct1011 10
recur^^,
tI121t

study the ratlor~ale assoelated w ~ t h security prlclng, the beliavlot~r of

the extent lo w h ~ c tlie l ~ return cotnmensurate rlsk as well as the factors

affect r ~ s k An attelnpt also has been made to study the Investors perceptlol1 of r ~ s k .

Need for the Study

From tlie revlew of existrng stud~es'dearth of works
111l~itilali context

to test the effic~ency of cap~tal market 1s qulte e x p l ~ c ~ c . Besides. the Ilnportant areas where l n d ~ a n researchers have not co~lcrlltrated lnuch are tllr relat~onshlpof rlsk and return and the factors af'fect~np r ~ s k of a firm Thc

present study focusses on the behaviour of returns. ~ t relatlo~ish~p s w1t11rlsk which ~nc~dentallythrows l ~ g h ton the efficiency and behavloi~rof e q u ~ t y rnarket In respect of prlclng ~nechanlsm. In a d d ~ t ~ o the n present study II~I:, atte~npted to make a primary ~nvest~gation lnto the investors perception of r ~ s k w h ~ c hno study has probed as far as the researchers knowledge goes

7Baru;r Samir K, Raghunathan V. Verlna J K, "Research 111 C;ip~t:~l Market - A r e v ~ e w " ,V~kolpa. Vo1.91 No. 1 J~II-Marcli 1994 pj) 15-20

(3

Objective of the Study The focus of the present them is to examine the behavlour of returns
11 alllls on equlty shares and the r ~ s kassociated with the returns. Inc~de~~tally

at evaluating the parlty between risk and return in determining the equil~br~ulli level in the prlces In lnd~an cap~tal market The study also trlzd lo zxplol-r

the factors affectrr~gr ~ s k The m a n emphasis is on exploring dltlerent r ~ s k variables and observing thelr tie-up w ~ t hrequlred rate of return on eqully shares in India, assulnlng the ex-post return ~nforrnat~un works as surc~galate for ex-ante prediction of securlty return More spec~fically~t I S c o ~ l i l ~ ~ ~ l t e d

to lnvestlgate the assoc~ation between equlty returns and varlous rlsk ~r~casurc\ l ~ k edistributional var~ables,market factor and corporate funtla~~~entals

Incidentally the study also aims to make observation wltl~ regard to return regillar~tyassociated w ~ t h equity shares where the r a t ~ d o ~ ~ ~ or ~ l<1111erw1sc ess of securlty return
IS

studled

The study also has trled to make a prel~ln~~lary etlqu~ry on the

perception of risk of

different tylxs of Investors

Research Questiolis In order to fulfil the aforesaid objectives the study has attempted tu provlde answers to the following questions by making use of Indian share price data.

Do periodic returns on equ~tyshares are Independent of each otlier or random In nature?

7
2 Does d~vers~fication reduce the r~sk'? portto110 can be

on the risk, to what extent tile 3 . If d ~ v e r s ~ l i c a t ~reduce diversified'?

4. D o market risk (established by CAPM) explalns the relat~ve difference the share prlces In I n d ~ a and ~f yes how far'!

111

varrables viz standard deviat~ono f returns. tluril an11 5 . D o distr~but~orial fourth rnoment and market covariance have any relat~onship w~th rate ot return on equlty shares?

6 D o financial variables i e corporate funda~rientalsare d~scountedIn tile

securlty n~arket to enable the share returns to represent i n t r ~ n b ~ valuc" c

7. What are the s~gnificantfactors that deterln~nethe r ~ s k o f a ~olllpany'\

security?

.
~nst~ti~t~onal

8. H o w do different inivestors percelve risk?

9. H o w far risk perception d ~ f f e rbetween ind~vrdual and ~nvestors" Hypotl~r* Based on the above sa~dobjectrves the follow~ng hypotheses have been tested.

H, H, H,

The returns on equity shares are independent o f each other

Risk reduces by d~versificatron and return is Ilnearly related to r ~ s k

Distribut~onal,tnarket and financral var~ables are determinat~on o f rate o f r e t u r n on equltles. relevant to tlic

H ,-

Select financial var~ablesperceived by the researcher deteriil~~ie risk of an equlty share to a major extent

H, -

The risk perception of ind~vidualequlty sliare holders differs fruni that of irist~tut~onal sliare holders

Methodology The sample drawn for the present study were rroni act~velytraded shares only, as for cross sectional regression availab~lityof regular and

continuous data is a must The most restrlctlve factor in determining tlie s ~ z e and composit~onof the sample was avallab~l~ty of regular prlce quotalloils
Considering the avallab~lityof

continuous and coinplete data 71 act~vely

traded stocks belonging to different industry class~ticationsfrom Bonibay Stock Exchange Official Directory were cons~dereddurlrig tlie per~od I975 to 1992. Mo~itlietid prices were put to use for tli~swork T o asless tlic

explanatory power of corporate fundamentals 18 years li~iaiicialstateliierits were c ~ l l e c t e d In all 9 finaiic~al ratios from 23 were cons~dered as

explanatory variables The selection of 9 represeritative var~ables were hiised on p r ~ n c ~ p a component l analys~s The ratlo having the hrghest corrcl;it1<111 with the principal component was considered tlie best rcpresentatlve of group of similar ratios
A sample of 100 investors was contacted

icdopt~ng

convenient sa~rlpllng method to elicit information perception of risk

pertalnliig to tI1c11

9 Source of Data The present study

IS

a blend of prlmary and secondary data

Data

relatlng to company fundamentals, their monthend prices, dlvldend, bonus share infor~nat~ons etc Directory were collected from Bombay Stock Exchange

Bombay sensitive Index ~nfor~nation were collected fro111data

publ:shed by Bombay Stock Exchange foundation. To u~ldzrlta~ld ~n~t.stor'\ perceptton, a deta~ledquest~onnaire was adln~rl~stered on a cross sectlotl of Investors both lnd~vidualand ~nst~tut~onal. Besides, fund managers. t~ank

offic~als,stock brokers, and officials of Madras and Dclh~ stock exclla~~ge were contacted personally to have first hand ~niormatlonabout the tllattcr under study. Period of Study The entlre analys~s was carr~ed out for a period of 10 years
I t.

1ro111

1981 to 1990. Thouglr the data were collected from 1975 to 1992 the actuill observat~o~: was confined to 10 years only Data relating to tllr lirst
SIX

years were used to construct d~tierent f i ~ ~ a n c growl11 ~al rates such 2 1 s growtl~
III

sales. growth ~n assets. earnings,

d~v~dend etc s

However the <IIII;I

pertaining to 1991 and 1992 could not be used as the result were gettltlg
distorted In the tllne serles analys~sbecause of the erratlc share prlce

behaviour caused due to a series of inc~dentslike securlty scam. Bo~llhay bomb blast, earth quakes, Ayodhya issue etc. It is however assumed that for

a behavioural study l ~ k e thls 10 years per~odI S suffic~ent The per~odwas

also cons~deredadequate to identlfy those consistent r ~ s k factors whrch

interact with securlty returns.

Statistical Tech~liques Used Several pardlnetrlc iuld n o ~ ~ - p a r a ~ ~ s~ l~ e~ l rl~ ~c rt~ tools c a l were used lor the analysls of the study. They are s~mple regresslon ~ n u l t ~ p regressxon. le pr~nctpal component analys~s,chi-square test, run test and ser~al correlat~o~~ or auto correlat~on and such alike. Sinlple Regression Simple regresslon glves the Ilnear relat~onshlpbetween e x p l a ~ ~ ~ and ed explanatory var~able. The vlrtue of h e a r relat~onsh~p 1 s s ~ n ~ p \)ut l e qulte robust. I n this study for extracting the relative ~nfluenct. or 111arkct1-t~ctor~ secur~ty return tlus tool Ilas been used.
I I

The r e g r e s s ~ o ~Illterccpt ~ ( X ) 15

supposed not to be s~gn~ficantly dlfrerent from zero and the slope c o c l l i c ~ s ~ ~ t

(0) ~n~plyin the g degree

of assoclatloll between varlables

Tllc SI~IIII~L~IIIL

of coeffic~entswere tested by 't' ratlo and overall explanatory power was

measured through R2 value M u l t i p l e Regression s a regress~onalanalysls cond~t~onal upon It 1 lixed values ol the

explanatory variables and what IS oblalned 1 s the average or Illenn value o f Y , a mean response o f Y for fixed value o f X variables. The rnult~ple regress~o~~ analysis was used for estimat~ngthe relat~onsh~p between the share returus and d~fferentd~str~butlonalmarket and financial varlables as well as to deter~n~n the e explanatory power o f seven financial variables o n systelnatlc rlsk (Beta). The data was nia~nlyanalysed on the basls o f c o e f l i i ~ c n tot

~nultlple deter~n~nat~ (R2) on wli~ch was found I n every regresslon c q t ~ a t ~ o ~ ~

Principal Component Analysis It

IS

generally performed to simplify the

description of a set of

interrelated var~ables It can be surnmar~sed as a method of transfor~~ilnp the original variables into new uncorrelated var~ables The new var~ablesare called principal components. The company funda~nentalsconsidered were 23 in number. Which were segregated into 9 categories based on t l ~ e i ~

theoretical s ~ ~ n i l a r ~The t y . representative of a particular category was choseti on the basls of the h~ghest correlation w1t11the pr~ncipalcolnponent fro111eil~ll group of ratlos which were later considered as ~ndependentvarlahles multrple
regressions
III

the

Subset Regression Th~s techn~queenables

d

detalled exalnlnatlon of regressiun ~nodels

It prov~desall posslble subset variables where from the regresslor) equations that can show i~nprove~nent In the explanatory power can be considerrd Different subset regression equations were selected by using the rule of tl1u1111) applicable to subset regressions.

Chi-Square Analysis Th~s technique enables to test the d~fference between expected arid observed frequencies. Tlils techn~que has been used for the a ~ l a l y s ~ to s exalnlne whether there exlst any s~gnlficant d~fferen~ In e the perceptlolls inst~tut~onal and indlvrdual Investors
~ 1 1

12 R u n Test T o test randomness In a serles o f numbers run lest

IS

used. I t

IS

non-parametric test. T h ~ e s x h ~ bwhether ~t the relationsh~p betweell

successive

numbers 1 s random or not

T o test the randomness In the share returns run

test had been appl~ed. T o test the ~ndepender~ce o f returns i n the serles ut returns the number o f runs were calci~latedIn the serles and tested whether d~fferent from the number of runs i n a purely rando111 they were s~gn~ficantly serles o f same slze. A u t o Correlation relcr l o 1I1e Auto correlal~un otherw~secalled ser~al correlat~ur~ correlat~on cwffic~ent between a serles o f number w ~ t h lagg~ng nu~nbrrs o11 the same tlnie serles. The ser.al correlat~on analysis had to be carr~ed out to detect the trend i n security returns The ser~al correlation were calcula~e~l w~th 24 lags to detect the relat~onship o f return with successive returns up
111

24 lags there by ~ n d i c a t ~ n dependence g or independence

D a t a Analysis The analysls In undertaken In four phases I n the lirst phase the

behav~our o f return as well as risk 1 s studled. For the purpose o f study~ng return and testlng the random walk behaviour or otherw~se the ser~al

correlat~on analys~sand n l n test were adopted. Ser~al correlat~on analys~s assumes the existence o f a statistical distribut~on where in the lags had bee11

13 carried out up to 24 in serlal order. The auto correlat~on coeffic~entIneasurr: the degree and dlrectlon of relatlonsh~pof two returns
Irl

the series

of

between returns. The coefficient l ~ e s

+1

to -1 ind~cat~ng posltivr nrgatlve

or zero correlation A zero correlation indicates absence of any pattern The auto correlation coefficient of the data are said to be significant wlie~ithey are more than 2 standard error at 5 % level of significance and 3 starldt~rd error at I % level of slgn~ficance. When auto correlauon coeflic~entsiirr

significant ~t lnd~catesreturns depend on 11s preceding return

Tllus future

return can be easlly predicted. In the light of ~tthe data of returns had heen analysed for thew dependence or otherw~seby 24 lags The auto correlatlon coeffic~entcan be calculatrd lor
ti111~ lag

IS

Where r, = auto correlation corftic~ent

k
n

= the length of time lag.

= number of observation.

X, = value of the var~ableat tltne t

14 T o substantiate the results of auto correlat~on and to e s t a b l ~ s ltile ~ behav~our of returns a non-parametric test also was a d ~ i i ~ n ~ s t e by r e dthe hell) of run test. Run test is simply a sequence of ident~calobservat~ons H a v ~ n g observed a sequence of observat~on of which n, are one kind and
11,

are ol the

other I n d , the randomness can be tested by countlng the nu~nherof runs The test is performed by comparing the actual number of runs ( R ) w ~ t lll ~ li~t of expected nu~liberof runs (M) on tlie assull1ptloli that successive retulns are ~ndependent of each other If the observed runs are not s ~ g ~ ~ ~ l i c a ~ ~ t l q
IS

d~fferentthan that of expected runs (M) than 11

~nlkrred.tile

successive
IS

returns are independent. The degree of randomness present studied with the help of K value

In the data

K value is

notli~ngbut tile d ~ l f e r e n ~ e

between observed and expected rums In terllls of expected runs The formula used to find K value 1s

K =
Where R =

R-M M

Observed nurnber of runs expected number of runs.

M =

The expected number of runs are calculated by the forniula

15
and, Standard d e v ~ a t ~ o on f the sampllng d~stnbution o f expected nuluber o l runs 1 s

Where M R = Mean o f sampl~ng d~str~butlon o f nuliiber o f runs

OR

= Standard error o f sampling d ~ s t r ~ b u t ~ o n = riu~nber o f observat~onso f one klrid

n,

n2 = number o f observat~ono f other klnd The standard nor~nal varlate can be calculated w ~ t h the lor11iul:i

R - MR
Standard Normal Varlate Z = ---------

OR
Observed number o f ruris I.e., Z = Standard Deviat~on of Su~n 'The co~nputedvalue o f Z can be co~i~pared w ~ t htlie standard or

Expected nu~iiber ol rurir

c r ~ t ~ cvalue al o f Z obtalned from the table o f standard nornial d ~ s t r ~ b u t lfor o~i the level o f s~gn~ficance The sequence
IS

sad to be r a ~ i d o ~ ITn the Z value

1 s less than the table value at a particular level o f sigri~lica~ice Tlus test is e~nployed not only for testing wl~cther tliz results corroborate with that o f serial correlation result but also to dlscovzr t l ~ c

presence o f occas~onalnon-random changes In returns.

Behav~ourof r ~ s kI S studled by observ~ngthe

changes

111

r ~ s k:IS

measured by standard dev~atron by ~nalungadd~ttons to tile portfolrr~.selcct~ng scrlps at rand0111 However to exarntne the relat~onsh~p that portfol~o stal~d;ird d e v ~ a t ~ odecreases n to an asymptote as dlvers~ficat~onincreases a Illtear regresslon analys~s was performed by fitt~ng a least square regressloll

function.
Y = p(l/X) + A Where.

Y
X

= Computed mean portfol~o standard d e v ~ a t ~ at o ~ela c l ~ level ot X

=

Porlfol~osize

Furtller to determ~ne the ~narket rlsk (beta) of each ~ r ~ d ~ v ~sccurlly dui~l t ~ t s ~e~ r ~ee s regresslon analys~swas adopted. Towards Ihts e~ldeavourthe

return relattng to all selected scrlps were regressed ~ndrpcndc~ttly w1l11~nitrkct Index to ascertain co~npanyw~se beta and 11s explanatory return. lines The est~matedcharacter~st~c Rl = a + OR,,,, Where. R, = Return on ind~vidualscrlp calculated power on security

+ e,

Harvard Business Review, Jan-Feb 1965, pp 63-75

reno nor L. Jack, "How to Rate Managelllent of I n v e s t ~ ~ ~ Funds". enl

17

R,
a

to return as above = Return on market Index calculated s~rnilar

=
=

Regress~on Intercept Slope c w f f i c ~ e n t lnd~cat~n market g o r systematic r ~ s k

0
e,

= Error term.
T o evaluate whether the relat~onship between return and 111arketr ~ s k

IS

lrnear or otherw~se linear second and t h ~ r dorder cross s e c t ~ o ~ lregresslolls al

were r u n r form and second and t h ~ r dordcr ~~OI~I~<)IIII~II fils The l ~ n e a regresslon used I n t h ~ s phase o f the study were

Bo

Y = B,

+ B , X + e, + B , X + B 2 x 2 + e,

Y = Bo

+ B , X + B 2 x 2 + B 3 x 3 + e,
~ ~ ~ I ;w Ic ~ re I~III

I n the second phase ~ ~ i u l t r pcross le sect~onal regression

est~mated to determ~nethe relat~onsh~p between d e p e ~ ~ d and c ~ ~~ t ndepc~ide~lt varrablcs Stepwrse

neth hod o f regresslrlg thc depelidelit and ~ ~ i d e l > r ~ ~ r l c ~ ~ l

var~ables was also used so as to find out how Independent var~ahles collect~vely and ~ n d ~ v ~ d u a affect l l y the dependent var~ahles

I n the thlrd phase o f analysis the study e~nployedmultiple regressloll to esti~nale determinants o f r ~ s k The ~ n u l t i p l e regresslon equation. o f general from adopted in tllcsr two phases (3rd and 4Ih) IS glven as

The data was ~ n a ~ n lanalysed y on b a s ~ sof coeffic~entof ~ n u l t ~ p l t . deterlnlnat~on ( R ' ) w h ~ c h was found for every regresslor) the for111 ol

regresslon equatlon In 3rd phase w ~ t h all dependent var~ables was as tollowr R2t-1 = X

+ B3KUR,t + B4h4B,t + BsdP,I + B,LOG S,t + B, LEV,[ + B8P,t + B,EV,I + B,,,AB,t + B I I P E , t + BIZEGlt+ BI3LIQ,t + e,
+
BISDit + B2SK,t

Where, SDit = Standard dev~atlonof tth firm's return for tth per~orln~easuredits

Sk,t = Skewness of the return for the

lth

firm for tth pzr~otlcalculated as

Kur,t = Kurtos~sof returns of the

I'h fir111for tth period calculated as

Mb,t

= Market covarlanct: of return calculated as

as COV -----6m2

R, R m

Dp,t

D~v~den payment d of the firm

'I

'for 't'tll per~odas i~leasuredby

( I ) DPS i EPS (2) DPS 1 100 (3) Changes o f D~vade~~clld pcr

share LogS,t = Size of ith firm for th per~odmeasured as ( I ) Log of total anets (2) log of total sales (3) log of net worth LEV,[
=

Leverage of debt+

I ' ~firm

dur~ng tIh per~od~ncasurcdas ( I ) ( L o ~ l g - t c r ~ ~ ~

Debenture

Short-term Debt) I Total Asselr ('2)

+ Short-terin Debt + Debenture)/ Net Wort11 (3) (Long-term Debt + Debenture) i Total Assets (4) (Long-ter111 Debt + Debentureli Net Worth
(Long-term Debt P,t
=

Profitab~l~ty of

I ' ~ firm

for tlh period measured as Profit)

(Operat~ng Profit

+ Non-operating

(1)

Net Worth Operating profit

+ non Operat~ngProfit + Interest

Debenture

(2)

Net worth

+ long-term debt

Operating profit

+ non operatang profit

(3)

Total Assets

Operating profit
(4)

Non Operating Profit

+ Interest

Net Worth Operat~ngProfit

Non Operat~ngProfit

(5)
F~xed Assets

EV,t

= Earnlng v a r ~ a b ~ l ~ otfy lthfirm for tih per~odco~~rputcd 2 1 s the

standard deviat~onof firms EPS for the lllost recent five years

Ab't

= Accountrr~g beta o f rth firm form tth p e r ~ o d IS measured ac the

regresslon coeffic~ento f EPS o f

lib

firm In relat~onto average

EPS o f all firms put together by for~nula

EPS,,

EPS,,

8 2 E P S , 8'EPSm,

PE,t

= Prrce earning ratio for

lth stock

for tih period i n the price o f one

share d~vrded by EPS for last year G,t

= Growth o f
lth firm

for

Ch perlod computed as ( I ) growth o f illlets

(2) growth o f sales d u r ~ n g five ~~nlnediate preceed~ng years

Liq,t
=

l~quid~t oyf ith firm during t'h per~odmeasured as ( I ) Current Assets 1 Current Liab~lities.(2) Current Assets 1 Total Assets.

The representatlve of each group of financlal ratios was selected wlth the help of the ratlo hav~ng tugliest correlation with pr~ncipalcolnpollerit ol the group of ratlos. Thus out of 23 financlal var~ables 9 financ~al var~;ihle were selected In the tli~rdphase of the analysls market rlsk was regressed agalllst seven Independent financ~alvarlables They were slze, leverage. return
t111

Investlnent, dlv~dend payout, accounting beta, growth s ~ Id lqu~d~ly The fourth and last phase of tlic analysls was conducted by the help of prlmary data collected from a cross lndlvldual and insutut~onal Investors sectlon of Investors ~ncludi~ig

The data collected was analysed wlt!~

the help of chi-square test to draw inference about the rlsk 1,erccptloli of ~lldlvidualand ~ n s t ~ t u t ~ o n Investors al The test statlstlc was

x2 =

(0 - E ) ~
. . . . . . .

E
Where,

x2
0

= Chi-square value = Observed frequency = expected frequency

In order to test the relationship between risk

varlables and rate o f

return on equities the rate of return on equity shares was calculated as tilt

22
geometnc mean of the expost monthly returns. The geometric ineali rate 1s the same as the compounded rate of return ~erlove and ~ ~ r d i t t have ~'~

einplr~callyfound out that geoinetric mean rate of return is almost same as internal rate of return. Guptall used internal rate of return In 111sstudy The rate of return for single tlme penod is calculated as

Where.
St
+

= =

terminal prlce In~tlal prlce

St dl

= dlvidend of tlme period 't' p a ~ d dur~rig the time perrod t

In thrs study the a d j u s t ~ n e for ~ ~ tbonus shares 1s done by 111~1t1plyt11g

the post bonus Issue average prices and dividends by a bonus ildjt~st~ne~ll factorL2(I

+ r) where r is

the ratio of bonus Issue

For example 11 a bollus

' ~ e r l o v e , M . , "Factors Affectrng D~fferences A~nong RaLe of Retur~ls on Investment on Individual Com~nonStock", Revrew of Econonircs ntid Stanstrcs, Vol 3 , Aug 1968, p.252. I O ~ r d ~ t tF i .. D , "Risk and Required Rate of Return on E q u ~ t ~ e s " , Journal o f F~natlce,Vol 22, March 1967, p 23. "Gupta, L.C , Rate of Rerun1 on Equrties rlze I t ~ d ~ n Expr,?entr. rl Oxford University Publicat~on1981 Delhi p. 12

23
Issue
IS

made at one share for every 4 shares held then r will be 114 and

bonus adjustment will be I

114 ie 514. In order to adjust right Issue

111

~nformationregarding value at which rights were traded In stock ~narket

this study no adjustment was made In the sliare prlces for right Issue because for many firms the value of rights issue were not market quotation Li~nitatio~ of~ the s Study
available In tlie stock

I.

Data collected frorii Bombay Stock Exchange Directory are subject to the defic~encyof secondary dala

are based on past accounttllg 2 . The colnputatlon of Independent var~ables data for whlch the accounting procedure (nay d ~ f f e ramong tlie sa1~1l)lt: UllltS.
3

Expost ~nforlnat~on 1s used to f r a ~ i ~ an e oplnlori about the future beliavlour of share prlce

~ e l e r ; n r e of the Study The study has important ~ r n p l ~ c a t ~ o pertalnllig ns to the eificlel~cyol l n d ~ a nCapital Market. Test~ngof independence or interdependence of the p e r ~ o d ~stock c return and spec~fic enquiry on r ~ s k return relatlonsh~p

conducted (nay be of greater s~gnificance to the players in the Indian Cap~tal Market The analys~sdraws Inferences on the efficiency of lndlan Cap~tal

Market to accurately discount various nsk factors. The Inaln justificatlol~oi

24
the study is that lnost o f the work down i n I n d ~ ahave concentrated
011

studylr~g the share prlces behav~our by lestlng only rando~nness than s l u d y ~ ~ ~ g the behaviour exhaustively. return
IS

Where

i n the present study the beliav~ouro f

studied i n relation to risk also. From an examinat~on o f e~llplrlcal

ev~dences ava~lable In lnd~an context 11is found that very few have exa~iilned the relationsh~po f risk and return l 3 analyse the behaviour of The present study has attenlpted to

return In isolat~onas well as I n relat~on to r ~ s k

111

~nvestor's percept~ontowards r ~ s kfill the gap

empirical analysls o f

behav~our of return and r ~ s k as far as equlty share prlces are concer~led Orgallisation of Chapters The thes~scontains nlne chapters

f The first chapter belng an introductory one narrates the: rl;llure ( ~ (111:
probleu~,slgnlficance,object~ve hypothes~s l~rn~tations elc o f the s t ~ ~ d y The second chapter contans the scenarlo o f I n d ~ a nCap~tal Market the rccent developments and prohle~ns along w ~ t h

The thlrd chapter glves a tlieorel~cal frame work o f varlous sources

of rlsk and thelr relat~onsh~p wlth returns

The fourth chapter reviews exlstlng l~terature The fifth chapter divided into two parts
I ! .

The first part deals with behaviour o f returns and tlie

I 3 ~ a r u a Raghunathan, . Verma, op. a t . , pp 15-20

25
second deals wlth b e h a v ~ o u r of risk, effects o f d i v e r s ~ f i c a t ~ o011 t i risk and r tsh return relationship as postulated by CAPM. Emp~rlcal ev~dences o n Impact of several d ~ s t r t b u t ~ o n a nrarket l and financtal r ~ s k variables on the rate of return
IS

presented

111

the s ~ x t l i cliapler

An enquiry of the fundamental factors affecting risk of a cutnpeny

IS

attempted in the seventh chapter r ~ s kperceptluri ol

T h e e ~ g h t hchapter presents an analysis o n tlir Investors

Chapter nlne summartses tile study l e a d ~ n gI C I a fkw suggt-stlr,ll\