Risk and Return Relationship -An Empirical Study of BSE Sensex Companies in India

Bedanta Bora,Anindita Adhikary

doi:10.13189/ujaf.2015.030203

Bedanta Bora, Anindita Adhikary

Open Access

https://doi.org/10.13189/ujaf.2015.030203

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Abstract

Investment in stock market is subjected to diverse risks. The same is made in expectation of return which is in excess of a risk-free rate. The actual return the investor receives from stock may vary from his expected return and risk is expressed in terms of variability of return. As such, it becomes essential to understand magnitude of the rate of returns and the degree of risk involved. One noteworthy measure of systematic risk associated with an investment is Beta. It refers to the volatility of a stock in comparison with rest of the market. The stability of beta is of great significance as it happens to be an important tool for investment decision. In these contexts, the study has explored the relationship between returns of securities and market returns and also the stability of beta for a variety of stocks that formed a part of BSE Sensex. The methodology adopted here is empirical in nature. The required information for undergoing the research has been accumulated from secondary sources. The sample size for this study consists of 30 corporate firms that are listed on BSE and included in Sensex. Descriptive statistics and multiple regression model are being used to study the relationship between returns of securities and market returns. Stability of beta is tested as well. Findings indicate that there seems to be positive association between returns of securities and market returns and betas are unstable overtime.

Highlights

Investment in stock market is characterized by return and risk
There is 95% confidence that there is a positive relationship between returns of securities and market returns
The betas of some companies have increased during the study period while betas for some other companies have declined

Summary

Introduction

Investment in stock market is characterized by return and risk. The return may be in the form of yield or capital appreciation. Risk is the uncertainty of a future outcome. The return to be generated in future period is known as the expected return. The actual return over some past period is known as the realized return. The realized return on an asset may vary from expected return. Volatility may be described as the range of movement from the expected level of return. The more a stock fluctuates, the more volatile the stock is. This is because of the fact that the wide price variations create more uncertainty of an eventual outcome

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