REVIEW OF LITERATURE

In the area of risk and return analysis two well known economist made effort to study the
relation between risk and return and they are the people who quantify the risk and return
aspects of an instrument .they are Harry markowitz and William Sharpe.

Very broadly the investment process consists of two tasks. The first task is security analysis
which focuses on assessing the risk and return characteristics of the available investment
alternatives. The second task is portfolio selection which involves choosing the best
possible portfolio from the set of feasible portfolio. Portfolio theory, originally proposed by
Harry markowitz in the 1950’s was the first formal attempt to quantify the risk of portfolio
and develop a methodology for determining the optimal portfolio .prior to the development
of portfolio theory ,investors dealt with the concept of return and risk somewhat loosely
.Harry markowitz was the first person to show quantitatively why and how diversification
reduce risk .in recognition of his seminal contribution in this field he was awarded the Nobel
prize in economics in 1990.Harry markowitz developed an approach that helps the investors
to achieve his optimal portfolio position .in this contest William Sharpe and others try to
find out an answer for aquestion ,what is the relationship between risk and return and they
developed capital asset pricing theory .(CAPM)The CAPM, in essence, predicts the
relationship between the risk of an asset and its expected return .this relationship is very
useful in two important ways .first, it produces a bench mark for evaluating various
instrument .second it helps us to make an informal guess about the return that can be
expected from an assets that has not yet been traded in the market. De Bondt and Thayler
study the price in relation to book value in a universe of all NYSE and American Stock
Exchange equity issue. It has explained the relation between the market price and book
value, with stock being assigned in quintiles from lowest price to book ratios. The earning
yields effect on stock return is significantly positive only in January for the sub period.
Piotroski investigates whether fundamental analysis can be used to provide abnormal
returns, and right shift the returns spectrum earned by a value investor. He focused on high
book to

20market securities, and show that the mean return earned by a high book to market
investor can be shifted to the right by at least 7.5% annually. The authors developed
portfolio based on four fundamental conditions namely: Single ValueP/E, Market Price
<Book Value, established track recode on the shareholders return. Barely and Myers
supported Quality of earning as a key performance measure. It is base done the following
argument “the problem is that the earnings that firms report are book, or accounting
figures, and as such reflect a series of more or less arbitrary choices of accounting methods.
A switch in the depreciation method used for reporting purposes directly affects earning per
share. other accounting choices which affect reported earning are the valuation
of inventory, the procedures by which the account for two merging companies
are combined the choice between expensing and capitalizing. The total value of the
companies existing stock is equal to the discounted value of that portion of the total
dividend stream which will be paid tothe stock outstanding today. The net cash flow to
share holders after paying for future investment is sometime s knows as“company’s cash
flow”. This analysis is done at portfolio return on the excess returns for the market factors
using CAPM