Risk Free Model for Risky Stock Market: Evidence from Indian Stock Market

Abstract

The paper examines the return pattern of the Indian stock market and proposes a model for long term investors by maximizing and minimizing the risk. The rolling compounded annual growth rate (CAGR) of the flagship S&P BSE SENSEX index as well as CNX Nifty index is calculated over various investment horizons during the entire history of Indian stock market. It is observed that an investment horizon of more than 10 years will lead to a drastic reduction of loss probability which is almost close to zero. Long term investors with a perspective of more than 10 years can significantly enhance their return by extending the investment horizon by couple of years even if they are faced with huge market risk towards the end of their investment horizon. The study involves devising of trading strategies using metrics like P/E ratio, P/BV ratio, Dividend Yield, 200 DMA and P/E ratio comparisons so that returns can be further enhanced. The robustness of the study is examined by dividing the valuation metrics into various categories based on size.