International Indexed & Refferred Research Journal, October 2012, ISSN 0975-3486, RNI- RAJBAL 2009/30097: VoL IV *ISSUE- 37

Research PaperPhilosophy

Sartorial Risk analysis of Nifty Junior in respect of Systematic Risk Beta

* Vaibhav Vishal October,2012 * Scholar Doctor of Philosophy in the faculty of Management, CMJ University ,Meghalaya
A B S T R A C T
The Indian capital market has changed dramatically over the last few years, especially since 1990. Changes have also been taking place in government regulations and technology. The expectations of the investors are also changing. The only inherent feature of the capital market, which has not changed is the 'risk' involved in investing in corporate securities. Managing the risk is emerging as an important function of both large scale and small-scale investors. The individual and incremental information content of different economic determinants of common stock systematic risk is determined in the Finnish stock market. Based on previous theoretical articles, four financial characteristics of a firm are investigated: profitability, financial leverage, operating leverage, and corporate growth, measured as growth in earnings and dividends .Irrespective of the Four above mentioned factors Indian stock market has sown fluctuations in last decade . In my study I have tried to analyzed the companies on the basis of sector wise risk and have segmented the industries according to choice of investor for their risk taking ability , so that they can prepare there own portfolio. Keywords: CAPM, Industrial Sector, Capital market, systematic risk

Introduction In the fast growing Indian financial market, there are 23 stock exchanges trading securities. The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most advanced exchange with 1016 companies listed and 726 trading members. The capital market is an interface, where investors can buy and sell stocks and other selected financial instruments. In India the growth of technology brought indefinite opportunities and opened an arena for investors particularly in the capital market. The NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance Corporation of India. However, in the totally demutualised Exchange, the ownership as well as the management does not have a right to trade on the Exchange. Only qualified traders can be involved in the securities trading. It is well known that riskiness of an investments is related to uncertainty, which is associated with the expected outcomes from that investment. Furthermore, the total risk of investing in a stock is composed of two distinct risks. Capital asset pricing model (CAPM) explains one of them, particularly, the risk of being in the market. Malkiel and Xu (2006) identified this type of risk as the systematic risk. Such kind of risk is undevirsifiable. The other type - unsystematic risk is specific to a company's fortune. Since uncertainty can be mitigated through appropriate diversification, Sharpe figured out that a portfolio's expected return hinges solely on its beta, that is, its relationship to the overall market.

Litrature Review Number of factors will affect the risk return relation and the various factors which are external that affects large number of securities simultaneously are known as systematic risk and is denoted as beta () .These types of risks are mostly uncontrollable and One can examine the individual stock return to the overall market return by comparing how an individual company stock reacts to overall market fluctuation. CAPM is one of the models widely used throughout the world to explain the risk return relationship and the theory postulate that there is a linear relationship between beta and return. But the literature shows that the model gives different results for different market and thereby it is crucial to test the validity of this before applying to the field concerned. There are some researchers who studied the impact of macroeconomic factors on international beta values, like, DilipPatro, John K. Wald and Yangru Wu (2000), they found that several variables including imports, exports, inflation, market capitalization, significantly affect Beta. Grewal S.S and Navjot Grewall (1984) revealed some basic investment rules and rules for selling shares. They warned the investors not to buy unlisted shares, as Stock Exchanges do not permit trading in unlisted shares. Another rule that they specify is not to buy inactive shares, ie, shares in which transactions take place rarely. The main reason why shares are inactive is because there are no buyers for them. They are mostly shares of companies, which are not doing well.

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International Indexed & Refferred Research Journal, October 2012, ISSN 0975-3486, RNI- RAJBAL 2009/30097: VoL IV *ISSUE- 37

Jack Clark Francis (1986) revealed the importance of the rate of return in investments and reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain world, investors cannot predict exactly what rate of return an investment will yield. However he suggested that the investors can formulate a probability distribution of the possible rates of return. Preethi Singh (1986) disclosed the basic rules for selecting the company to invest in. She opined that understanding and measuring return md risk is fundamental to the investment process. According to her, most investors are 'risk averse'. To have a higher return the investor has to face greater risks. She concludes that risk is fundamental to the process of investment. Every investor should have an understanding of the various pitfalls of investments. The investor should carefully analyse the financial statements with special reference to solvency, profitability, EPS, and efficiency of the company. David.L.Scott and William Edward (1990) reviewed the important risks of owning common stocks and the ways to minimize these risks. They commented that the severity of financial risk depends on how heavily a business relies on debt. Financial risk is relatively easy to minimise if an investor sticks to the common stocks of companies that employ small amounts of debt. Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also for selling shares. He advised the investors to buy shares of a growing company of a growing industry. Buy shares by diversifying in a number of growth companies operating in a different but equally fast growing sector of the economy. He suggested selling the shares the moment company has or almost reached the peak of its growth. Also, sell the shares the moment you realise you have made a mistake in the initial selection of the shares. The only option to decide when to buy and sell high priced shares is to identify the individual merit or demerit of each of the shares in the portfolio and arrive at a decision. L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in the Indian stock market. The over speculative character of the Indian stock market is reflected in extremely high concentration of the market activity in a handful of shares to the neglect of the remaining shares and absolutely high trading velocities of the speculative counters. Donald E Fischer and Ronald J. Jordan (1994) analysed the relation between risk, investor preferences and investor behaviour. The risk return measures on portfolios are the main determinants of an investor's attitude towards them. Most investors seek more return for additional risk assumed. The conservative investor requires large increase in return for as-

suming small increases in risk. The more aggressive investor will accept smaller increases in return for large increases in risk. They concluded that the psychology of the stock market is based on how investors form judgements about uncertain future events and how they react to these judgments Data and Methodology :This study attempts to find out sectorwise analysis of Ststemetic risk Beta in National Stock Exchange of India. The basic data for the study has been collected from Prowess, a corporate database of Centre for Monitoring Indian Economy (CMIE). To analyse the determinants of market risk for the firms belonging to the Indian Industries listed in National Stock Exchange of India, a time period of eleven yearsn on from Janruary 1999 to June 2010 has been chosen. The sample has covered 282 firms belonging to listed Group companies of National Stock Exchange of India. AGroup companies of National Stock Exchange have been chosen for the study since the stocks of these companies are actively traded in the Indian stock market. Beta has been calculated on slope between return of sensex and return on National Stock Exchange of India . Beta scaled so that the market as a whole has a beta of 1.0. A beta greater than 1 means the price of the investment is expected to move up more than the market when the market goes up and drop more when the market declines. Imperical Results Data of 282 Companies of BSE( Nigty Junior) has been taken and beta of each company has been calculated on the basis of their previous returns . we have segregated the sector wise data based on the range of beta .The industry wise data has been arranged where beta is between 0 to 0.25 , 0. 25 to 0.5 , 0.5 to 0.75, 0.75 to 1.00 ,1.00 to 1.25,1.25 to 1.5 , 1.5 to1.75and 1.75 to 2 & more than 2. Beta ranging between 0 to 0.25 If we arrange the data of companies on the basis of beta ranging between 0 to .25 . we do not find data of any particular company .However in nutshell we can say that none of the sector represents in this range. Beta ranging between 0.25 to 0.50 If we arrange the data of companies on the

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Where

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International Indexed & Refferred Research Journal, October 2012, ISSN 0975-3486, RNI- RAJBAL 2009/30097: VoL IV *ISSUE- 37

basis of beta ranging between 0.25 to 0.50 . we find that most of the companies representing in this category are from Paints/Varnish ,Abrasives, Lubricants, Cigrattes - Manufacturers , compressors manufacturers ,Food Processing & Personal Care Industries. However 1/3 companies of Investments & Hotel Industry also falls in this category. Which can be defined as a most Defensive stock as its beta is less than 0.5. Beta ranging between 0.50 to 0.75 :- If we arrange the data of companies on the basis of beta ranging between .5 to .75 , we find that most of the companies representing in this category are Auto Ancillaries, Telecom- service, Automobile ,Chemicals, FinanceLeasing ,Glass & Glass Products ,Paper, Pharmaceuticals ,Pump,Refineries, Shipping Industries. However 1/3 companies of Shipping & Finance leasing Industry also falls in this category. These can be defined as a defensive stock as its beta is less than 0.75. Beta ranging between 0.750 to less than 1.00 If we arrange the data of companies on the basis of beta ranging between .75 to 1.00 , we find that most of the companies representing in this category are from the industries like, Agro Chemicals Telecommunication Equipment, Aluminium ,textile-mechinary, Auto Textiles, Banking Tyres, Cables, Casting & Forgings, Consumer Goods, Diversified, Edible Oil, Electric Equipment, Electrodes, Graphites, Engiens,Engineering,Fastners,Fertilisers ,FinanceHousing ,Hospitals ,Information Technology, Jewellary, Leather Products, NonFerrous Metals ,Miscellanious, Oil Drilling & Expolaration, Pacakeging, Plastic, Power, Genration/Distribution, Printing & Stationary ,SteelTyre/Tubes ,Sugar, Tea & Coffee Industries falls in this range. .However 1/2 companies of Investments and Hotel Industry also falls in this category. This can be defined as riskey stock as its beta is more than 0.75. Beta ranging between 1.00 to 1.25 If we arrange the data of companies on the basis of beta ranging between 1.00 to 1.25 , we find that most of the companies representing in this category are from the industries Auto Tractors, Cement,Civil

Construction ,Computer Hardware ,Computer Software ,Computer Software Traning, Finance- Investments ,Finance -Term Lending ,Media & Entertainment , Mining/Minerals , Petro Chemicals ,Power Transmission Equipment ,Realestate ,Retail ,Steel Industries falls in this range. However 1/3 companies of Investments also falls in this category. We can be defined as a stock having moderate risk as its beta is more than 1.00. Beta ranging between 1.25 to less than 1.50 If we arrange the data of companies on the basis of beta ranging between 1.25 to 1.50 , we find that none of the companies representing any industry in this category is available.However in this category We can define stocks as risky as there beta is more than 1.25. Beta ranging between 1.50 to less than 1.75 If we arrange the data of companies on the basis of beta ranging between 1.50 to 1.75 , we find that most of the companies representing in this category are from the industries like Telecom Equipment ,Trading and Transport Industries falls in this range We can define these stocks as most risky stocks as there beta is more than 1.50. Summary and Conclusions: From the above results we can conclude that some sectors such as Paints/Varnish ,Abrasives, Cigrattes, Manifacturers, Food Processing, Personal Care, Pump , Compressors ,Glass & Glass Products , Lubricants ,Paper industry can be defined as defensive sectors their shares will vary less than variation in stock exchange as their beta value is less than 1. whereas Civil Construction,Computer Software, Computer Software Traning, Term Lending Finance, , Non Ferrous Metals ,Mining & Minerals ,Petro Chemicals, Power Transmission Equipment, Realestate sectors , Telecom Equipment ,Trading and Transport Industries can be defined as risky sectors as their shares will vary more than variation in stock exchange as their beta value is more than 1. So as Indian invester according to their risk taking ability can prefer to invest in a particular industry on the basis of above mentioned results.

R E F E R E N C E
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