Abstract

The study attempts to validate efficient market hypothesis in Indian stock market by examining the relationship between risk and return. It also examines the possibility of diversification effect on portfolio risk, which is the composite of market and non-market risk. The study takes daily, weekly and monthly adjusted opening and closing prices of BSE 100 composite portfolios for the period of June1996 through May 2005. The findings suggest that the relationship between portfolio return and risk is very weak, based on daily return. It is moderate in the case of weekly return. However, portfolio risk and return exhibit a high degree of positive relationship when monthly return is used. Portfolio non-market risk shows a declining tendency with diversification.

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