Chapter II

Literature Review

Return and risk are inseparable in investment decision. Scrip’s return depends on many
variables and risk is also associated with the variables which influence the return on the
scrip. Any research should address the variables with which the research is carried out
and once the variables are identified then the research gap can be found out. The review
of literature of this study will help the researcher to identify the factors influencing the
risk and return and also the importance of systematic risk in evaluating investment
decision. Since the concept of systematic risk stems from developed market and
developing market the literature review covers the study with respect to foreign context
as well as Indian context.

Nerlov (1968), found the factors influencing return of the scrip by taking 800 companies
from the Standard and Poor index with the span of 15 years. The factors were identified
by the study such as sales, retained earnings and growth in earnings were regressed with
return of the scrip for the purpose of witnessing the influence of such factors on the
return and it was found that dividend and leverage had strong influence on market return
in long run whereas asset growth, inventory turnover, cash flows and liquidity did not
exert any influence on the return of the scrip. It seemed that those variables were proved
to be redundant.

Beaver and Others (1970) made an attempt to find out the sources of factor which was
about to influence the systematic risk .The study met out the purpose by way of
identifying the key explanatory variables such as dividend payout, growth, financial
leverage, liquidity, size, earning variability and earning beta. The study tested the
variables with the help of cross sectional tests and found out the leverage and accounting
betas were positively correlated and in similar way earning variability and payout have
significant correlation as per the expected direction. However, the size exhibited a

17
weaker correlation. The study used a sample of 307 firms, from CRSP Tape, for which
complete accounting and stock prices data were available for the period of 1945-1965.

Blume (1971), Levy (1971) and Levitz (1974) have suggested that the portfolio betas
were more stable than individual security beta. They also found that the assessment of
future risk was more reliable in large portfolio comparing to smaller portfolio, and for
individual securities the beta values were not reliable in terms of period. Lengthening the
period, say for example 13 weeks to 26 weeks regressed value are less reliable than 26
weeks to 52 weeks. In summary they concluded that minimum intake of 25 portfolio and
larger with forecast intervals of 26 weeks and larger, past beta may be taken as proxy to
predict future beta co-efficient.

Baesel (1971) showed that the individual security betas were stable on the ground of
increasing the length of estimation period. He proved that beta stability has shown more
improvement when the estimation period was larger.

Sharpe & Cooper (1972) produced evidence in terms of stability with respect to
individual security betas by way of taking US samples from 1931 to 1967 with the help
of applying transition matrix approach and concluded that individual security betas
showed stability over the period of time.

Black, Jenson and Scholes (1972) took an effort to investigate the stock market as an
efficient and the purpose for which they took the all scrips of New York Stock Exchange
and divided into ten portfolios with the span of 35 years. The study found that higher
risk portfolios fetched higher return and further they found that the stocks those of
belonging to the category of lower risk were undervalued whereas the stocks those of
belonging to the category of higher risk were overvalued.

Meyers (1973) came out with additional proof on the stability of individual security
betas by taking 15 years period from the year 1952 to 1967 and they found the betas
were stable for at least seven years and proved beyond the doubt that the individual

18
security betas were also stable by discounting the earlier assumptions of individual
security beta.

Ben and Shalit (1975) made an attempt to find out the relationship between the firm risk
and its leverage, size and payout ratio. The study analyzed 1000 large companies listed
in the fortune directory in the year of 1970.The study found that the relationship by way
of applying multiple regression. The result showed that the firm size, leverage and
payout ratio were found to be significant determinant of equity risk.

Barry & Wicker (1976) came out with the result that apart from the factor such as
number of portfolio and duration of sub-periods influencing beta stability, the changing
characteristics of the firm like capital structure, business policy marketing strategy and
economic environment has also made an impact in determining the stability of beta.

Gooding & O’Malley (1977) worked out correlations between the portfolio betas by
way of taking 200 samples from US during the period of 1966 to 1974. The portfolio
betas were found in different market phases and the extreme portfolio betas were either
high or low exhibiting significant instabilities.

Basu (1977) found in the study of 1400 Industrial Firms from the Compustat File of
NYSE during the period from September 1956 to August 1971, the stocks with low
price- earning ratios had higher average returns than stocks with high price-earning
ratios.

Roenfeldt, Griepentrag and Pflown (1978) made an investigation in finding the beta
stability by way of dividing sub-period at different time interval. They took a sample of
644 firms with the price data for the period 1963 to 1974. They first made an attempt in
estimating the beta co-efficient for the period 1963 to 1966. They gave ranking on the
basis of beta coefficient and then the firms were grouped. Further they estimated the beta
for the rest of the period in such a way of taking different sub-periods from one year to
four years such as 1967 -68, 1967-69, 1967 -1970 & 1967 – 71. By way of analyzing the

19
above data they found the beta was more stable when it was compared with previous
four year periods than one year period.

Fabozzi & Francis (1978) showed that beta was a random co-efficient. Because of the
above reason New York stock Exchange (NYSE) had less than 50% of the risk
explained by the market forces. The OLS estimate of beta was invariant over the time
while the beta moved randomly.

Alexander & Chervary (1980) showed the result against Baesel to prove that the
extreme betas were less stable compared to interior beta. They also contradicted the view
of Baesel that longer the period would increase the beta stability. They put forth the
result in such a way that not only the period determined the stability of beta but also the
beta was determined by the magnitude of portfolio.

Chen (1981) tested if any relation was existed between variability of beta co-efficient
and portfolio residual risk. By way of analyzing the relation, he came out with the
conclusion that OLS method was not appropriate to estimate portfolio residual risk if
beta co-efficient changed over the time and further he stressed that it would lead to
incorrect conclusion.

Theobald (1981) showed that the stability of beta was a function of time period used for
estimation of beta. He also showed that the stability would however not increase
indefinitely with length of estimation period.

Gupta (1981) investigated a large sample of 276 companies from Bombay, Calcutta and
Madras Stock Exchanges over a 16 year period from 1961 to 1976 towards
characteristics of the rates of return on equities in the Indian capital market and the study
concluded that the rate of return provided by equities are not satisfactory since 20% of
the returns for various holding periods were negative. The returns provided a partial
hedge against inflation and the fluctuations in returns even within a year were large
enough to conclude that time had an important bearing on realized return. The risk was
considerable even when investment was a part of a portfolio of securities.

20
Gupta (1981) found share price data between the periods of 1960-76, a total 606 equity
shares for one or more holding periods were taken into consideration, from Bombay,
Calcutta and Madras Stock Exchanges. The long term rates on equities were found to be
less than that of company deposits, debentures, long term bank deposits and preference
shares indicating that equities providing hedge against inflation were found to be
redundant and the study posed a question of doubt about the validity of CAPM in Indian
capital market.

Eubank Jr. A.A and Zumwalt J.K. (1981) examined how far the forecast errors of beta
predictions were influenced by the length of estimation period, the length of prediction
period, the size of portfolio and the risk class of the security or portfolio. The study used
the concept of mean-square error to estimate the forecast error measure. The mean-
square error took into account of bias, inefficiency and random error which were used to
determine the source of forecast error. The result obtained by the study revealed that as
and when the length of the estimation period was increased the accuracy in forecasting
was improved. Further, it was also observed in the study that the size of the portfolio and
the risk class of either security or portfolio had an impact on forecasting the stability of
beta. From the above study, the concept of mean-square error helped the researchers to
estimate the forecast errors as much accurate as possible.

Hawawini (1983) presented a model that explained the direction and size of changes in
beta resulting from changes in sampling interval. He reported that as the interval is
lengthened, beta of thinly traded stocks increased whereas betas of frequently traded
stocks decreased.

The study conducted by Masulis(1983) showed that the relationship between the scrip’s
return and the corporate leverage. The study was carried out by the researcher to find out
the impact of leverage on return of the scrip on the basis of the fact that high levered
companies might tend to get an advantage over the low levered companies by way of
availing tax shield .The study concluded that the higher levered companies had an better
impact in terms of their scrip return.

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Srivastava (1984) studied a cross-sectional study of 327 firms of Bombay Stock
Exchange for the year 1982-83. The study spotted that there was an association between
the rate of dividend of a company and its market price of equity and high dividend rates
were the cause for higher market prices of securities. The study did not support the MM
approach of assumption ‘Dividend is irrelevant in terms of importance in explaining the
rates of return in Indian context’.

Bhole and Rao (1987) examined a study to identify and analyze the rate of return on
equity shares in India during the period 1953 to 1987 on 32 industries listed in five stock
exchanges in India. The study made an attempt to test the risk-return relationship and
found that there was an association between the return and risk by way of taking into
account of the return on nine financial and physical assets and further estimation
revealed that the return on the aggregate market was commensurate with the risk. It was
highly variable over one year periods, but it decreased with increase in holding period.

Sreenivasan (1988) empirically tested the validity of CAPM in India with stock prices
of 85 firms selected from Calcutta and Bombay Stock Exchanges from the period July
1982 to October 1985. Economic Times Index of ordinary shares were considered as
market proxy and found that CAPM relationship was valid.

In an attempt to explore the relationship between the return and the beta, explained under
CAPM model, Yalawar(1988) made an attempt to study in Indian environment. The
study has tested the excess returns version of the market model by way of considering
the monthly returns for 20 years from 1963 to 1982 relating to 239 stocks regularly
traded in Bombay Stock Exchange. Further significance of the beta estimate was tested
with the statistical approach to establish it to be explanatory variables for security
returns. The results extended the support for the applicability of CAPM and could be
regarded as good descriptor of security returns in the Indian equity market.

Sharma (1989), conducted a study to identify the factors influencing the relative prices
of equity shares in Indian context by considering a sample of 30 cotton textile units for a

22
period of 1976 to 1980, based on Bombay Stock Exchange. The study identified share
price as dependent variable by transforming it into log linear function and the variables
like dividend pay-out, growth, capitalization rate and size were taken as independent
variables and by applying regression to find out the influence of predictor variables on
market price of equity, the outcome of the result showed that the dividend payout,
growth and size of the firm emerged as significant variables.

In the study of Ramachandran(1989) he took 132 scrips of Bombay Stock Exchange

from January 1979 to December 1986 to test the validity of CAPM in Indian market. He
found that there was no evidence to prove that the model holds well in Indian context

Handa and Others (1989) conducted a study on the estimation of beta and its
relationship between the time intervals. The study further assessed the size of the
portfolio were sensitive to beta estimation. The study analysed the sample of data which
were taken from CRSP from the period of 1964 to 1982 and created 20 portfolios on
which the effect was estimated. The study revealed that the estimation of beta in terms of
individual level and portfolio level showed substantial difference with respect to time
intervals. Higher the time intervals showed that the portfolio betas were more stable than
individual betas.

The study conducted by Zahir (1992) to find out the possibilities of influencing certain
internal factors and external factors on market price of selected scrips of Indian stock
market. To carry out the study, the researcher took 140 scrips from the period of 1985 to
1987 span of two years. The identified external variables were RBI security index,
money supply and time factor whereas the internal factors such as share price, bonus
issue, growth in assets, earning per share, book value per share, yield and variability in
market price. The result showed that the model of regression could explain the
independent variables to the extent of 67% in terms of higher volatility stocks whereas
the same variables were explained by the model to the extent of only 29% with respect
to low volatility group of shares

23
Gupta and Sehgal (1993) tested the CAPM in Indian context by way of taking 30 scrips
constitute BSE 30 index from the year 1979 to 1989 span of 10 years. The 30 stocks
were divided into three equal portfolios by engaging different weights. The study ended
with the result that there was chance of exploring non linearity in terms of explaining the
returns and therefore it was concluded that the CAPM was not likely to be the good
indicator of asset pricing in the Indian capital market during the study period. Though
there was a relation with risk and return but at insignificant level.

The study was under taken by Ray (1994) to explore the applicability of CAPM in
Indian context for which the study traced 170 scrips from Bombay Stock Exchange
spanning the period of more than 10 years. The study took different proxies such as RBI
index, ET index and the SENSEX to see the viability of CAPM. But the result was as
such expected that CAPM was not a reliable source to explore the risk return
relationship.

Sehgal (1994) studied the concept of skewness in determining the nature of return. The
study made an attempt to explore the nature of return by way of taking 80 individual
securities from Bombay Stock Exchange during the period of 1984 to 1993 covering
more than 10 years. The study tested the scrips to find out the nature of returns
belonging to normal or non normal. The test showed the result that the individual
securities did not show any normal distribution in terms of returns since the return of
scrips has significant positive skewness. The study also revealed that NATEX also
showed the non normal return.

Obaidulla (1994) made an attempt to study the applicability of CAPM in Indian context.
The study covered monthly prices of 30 stocks from BSE for the span of more than 15
years indicating that there was an evidence to ensure that the CAPM was no more
applicable in Indian context in terms of portfolio betas since the coefficient of portfolio
beta were statistically insignificant whereas the coefficient of individual beta was
significant leading to conclude that CAPM was likely to be more applicable in terms of
individual beta.

24
Allen (1994) took the sample of 2500 US securities at the individual level and portfolio
level has concluded that the portfolio betas were no more stable or no less stable than the
betas of individual securities and the result obtained by him was in contrast with many of
the previous studies.

The study of Rao and Jose (1996) made an attempt to find out the influence of different
risk variables on security return for which 71 companies were taken from the period of
1975 to 1991, a span of more than 15 years. The study tried to explore the possibility of
showing evidence in supporting the CAPM and Arbitrage Pricing Technique models in
India. The study tested with different variables such as size, dividend policy, leverage
ratio, productivity, liquidity, profitability ratios, accounting beta, earning growth,
earning variability and price earnings ratio. By using cross sectional regression, it was
found that the regression coefficient was significant and consistent.

In India some of the studies explored the stability of beta. Mallick & Gupta (1996) have
found the evidence of year wise variability in beta in a sample of 150 companies of
Bombay Stock Exchange from the period of April 1991 to March 1996.

Madhusoodanan (1997) tested the choice of index as an influence factor to determine

the beta of the scrip. The study used both sensex and Natex for the purpose of
calculating beta. There was no much evidence to the result of the beta and the choice of
market index. Further the study found that there was no positive relation between beta
and the return and also showed that maximum risky portfolio gave the minimum return
while the minimum risky portfolio yielded comparably higher returns.

Ansari (1997) made an attempt to find the applicability of CAPM in Indian context for
which the date were taken from BSE spanning six years with 96 stocks. The study took
sensex as proxy for market portfolio and term deposit rate for risk free rate of return .The
study further divided into six equally weighted portfolios and tested the validity of
CAPM in the Indian market and finally it was found that there was no validity of CAPM
in Indian context.

25
An empirical study was carried out by Kwon and Others (1997) to infer the impact of
macroeconomic variables on the behavior of South Korean stock markets. The study
used Kospi Composite Price Index as a proxy for stock market behavior and the key
variables with which the study dealt in terms of economic indicators were Industrial
Production Index, trade balance, foreign exchange rate, oil price and money supply. The
study concluded that the above variables had a significant impact on performance of
stock market.

Vipul (1998) examined the impact of size of company, Industry group and liquidity on
Beta. From the study he came out with the result that the size had an impact on beta
value whereas industry group and liquidity had no impact on the systematic risk.

Brooks.R.D., Faff R.W., and Ariff.M (1998) explored the study of beta stability in
Singaporean market during the period of 1986 to 1993. The study made an attempt to
analyse the beta stability with respect to full eight year period and four year sub period.
While studying the full year period of eight years they witnessed a very high incidence
of beta instability by about 40 percent of the individual stock whereas in the four year
sub period comparison the incidence of beta stability was comparatively less to the
extent of 20%. The reason for the change was attributed to the selection of samples
during the listing change between the Singapore and Kuala Lumpur market. Hence the
analysis suggested that an absence of listing change had an effect on beta stability. As
far as the results were concerned in the paper, it was found that the results were
insensitive to whether the betas were estimated by Ordinary Least Square or other
techniques and the second one the results were insensitive to the Stock Exchanges where
the study was taken.

Andor and others (1999) tested the CAPM validity in Hungarian market to find out the
relevance of CAPM in the market. The study examined 17 companies listed in Budapest
Stock Exchange during the period of 1991 to 1999 with a span of nine years. The study
found that higher the risk was associated with higher the return and hence the study
concluded that the validity of CAPM was upheld with respect to the Hungarian market.

26
The study further supported that the measurement of portfolio beta with respect to the
return was also validated.

Philip R.Daves Michael.C and Robert A.Kundel (2000) examined the four return
intervals and eight estimation periods to determine the usage of return intervals and
estimation periods to calculate beta. The study used four return intervals in the form of
daily, weekly, fortnight and monthly returns. The estimation period varied from one year
to eight years from 1982 to 1989. As far as the outcome of the study is concerned with
respect to return interval, for any given estimation period, the daily return interval
provided a more precise estimate of beta. The study also noted that shorter return
intervals were associated with smaller standard error or greater precision and in the same
way increasing the estimation period from one year to three years the standard error kept
on decreasing. However, regarding estimation period the study posed a question of
reliability on estimation of beta. In some cases, the longer estimation period also
witnessed a significant change in the stability of beta. Hence the study concluded that the
longer estimation period provided more of bias so that the effect could be of less use for
financial practitioners.

Chawla (2001) found that the hypothesis of stability of beta was rejected for 20
companies out of 36 companies that he selected in a sample for the period of April 1996
to March 2002.

The study was attempted by Mohanty (2001) to find out whether there was relationship
between the size of the company and the return generated by the stock so that the study
tested the stocks from small category as well as the large category. The data were
collected from CMIE PROWESS data base spanning more than 10 years indicated that
the size of the company had an influence on return of the scrip in negative way as such
the larger the size of the company the smaller the return generation and vice versa

27
In an empirical study of Navin (2003) it was investigated that as to what extent the
relation was maintained with scrip return and market return by way of taking into
account of 30 scrips during the year of 1999 from BSE. As the study examined the
sensex, the study indirectly gave representation of various sectors. The study found
evidence that there was a strong relationship between scrip return and market return by
ensuring high power of R square and the coefficient of beta value was significant.

Chawla (2003) examined the influence of bull and bear markets on the stability of alpha
and beta for the single index market model. The data were collected from the year 1996
to 2001. The data pertained to the adjusted closing price of 74 scrips from BSE-100
index. The study tested both the bull and bear market. The study undertook the dummy
variable regression, F-test and paired t-test. The result from the study indicated that
alpha varied over both bull and bear market conditions but beta showed the variance
under one condition and showed the stability in the other condition. The study also
stressed that the variability of the beta was attributed to the industry specific. Since the
study was carried out with small number of samples which by nature restricted not to
pick up the adequate representation from the industry, the generalization of the study
may not be feasible.

Gompers and others (2003) tested the information on earning and dividend had an
impact on the equity price of the scrips. In order to meet out the purpose of the study,
they took a sample of 1500 companies from standard and poor’s index during the year
1990. By analyzing the data with the help of step wise regression it was found that the
impact was positive when the positive information on earning followed by the negative
information on dividend followed by the positive information on earning, the impact was
negative.

Sehgal and Kumar(2004) made an attempt to find the correlation between size and
return of the selected index and to meet out the purpose of the study he analyzed both
market based size and non market based size by taking the CRISIL 500 as proxy for
market return and from the study it was found that there was a strong size effect in terms

28
of determining the scrip return. Further to that it was also found that employment of
price earning ratio made the weak value effect in stock return.

The study with respect to find out the possibility of presence of CAPM in Indian context
by Mohamed and Devi (2004) explored the question of applicability in terms of
practical relevance and for which the study took the sample of 200 company scrips from
BSE span of 12 years and the study found by using regression model that the return
generated by the scrips was equally to risk free rate and emphasized that Sharpe-Linters’
CAPM is not relevant to Indian market.

Manickaraj & Loganathan (2004) used the sample of 38 stocks listed in the BSE
during the year 1990 to 1996 and showed that the beta values were not stationary over
the time.

Sehgal and Tripati (2005) examined the relationship between size and return of the
scrips on the basis of assumption that there was a relationship between the size of the
company and the return generated by the scrips .In their study they identified different
proxies for size of the company. They took market capitalization, enterprise value, net
fixed assets, total assets and net working capital and used them as independent variables
and market return of the scrips as dependent variable. With the help of multiple
regressions the study found that there was significant relationship between scrip return
and company investment.

Bundoo S.K. (2006) investigated the systematic risk for the listed companies on the
Stock Exchange of Mauritius. The study took into account of Capital Asset Pricing
Model and Market model to estimate the time variation of beta. The study made an
attempt in investigating the time varying beta in thin trading session. The result found
that the traditional beta estimates were different from the beta value of thin trading. By
way of analyzing the above concept, the study brought to light the decision taken in
terms of analyzing systematic risk, the role of thin trading became vital when market
themselves were characterized by thin trading. The study also revealed that when time

29
variation in beta was taken into account the spread of systematic risk was higher in
smaller firms than in larger firms. The reason for higher systematic risk in smaller firms
and lower systematic risk in larger firms was attributed to volatility in the market to a
greater extent.

Banerjee and Sarkar (2006) investigated the volatility of Indian stock market by taking
daily closing index value of NIFTY from 2000 to 2004 at the span of four years. The
study used GARCH model to explore the clustering of volatility and found that there
was clustering volatility and further the study investigated the effect of foreign
institutional investments on volatility by taking into account of foreign inflows into
stock market ended with the result that there was no clear evidence in proving that FII
made an impact on volatility.

The effect of diversification was studied by Raj and Rakesh in the year 2006.The study
made an attempt to find out the relationship between risk and return. In the study the
emphasis was given to the effect of diversification in mitigating the portfolio risk. The
study analysed the closing price of 100 scrips from BSE at the span of 10 years and the
scrip returns were regressed with market return with the help of market index model and
the result showed that there was a high and positive correlation between portfolio return
and risk.

Kohers and others (2006) made an effort in comparing the return of the stock market
with respect to emerging markets and developed markets. The study explained by way of
analyzing 49 companies of which 26 countries belonged to emerging countries and
remaining 23 countries belonged to developed countries. The study found that the risk
associated with the emerging market were more than developed countries. Since the
expected return of the investment in the emerging markets was commensurate with risk.
The study concluded that the risk averse attitude of the investors were found to be higher
in emerging market in comparing with developed market.

30
Gregoris and Others (2006) examined the validity of CAPM in Greek Stock Market for
which they tested the sample of 100 companies listed in the Athens Stock Exchange
during the period of 1998 to 2002. The study formed the portfolio with the available
securities and found that there was no association between the risk and return with which
the basic theory of CAPM was violated in the Greek Stock Market. The study was not
able to trace that the intercept of CAPM equation was equal to zero and the slope of the
equation did provide any excess return on the risk premium.

Shijin and Others (2007) examined the risk-return characteristics of common stocks in
Indian stock market for the period from March 1996 to March 2006 for a sample of 72
companies from Bombay Stock Exchange. The results of Vector Autoregressive Model
indicated that market risk proxy had persistent effects on stock returns in Indian market.

Haddad (2007) explored the stability of beta in relation with the size of the portfolio.
The study segregated the portfolio of securities into two categories with one of them in
large size and other one in small size. The study took the sample of 18 companies from
two different stock indices from the Egyptian’s stock market and found that the volatility
was persistent in terms of small portfolio whereas the large portfolio did not show much
volatility with respect to degree of return. The study concluded that the effect size of the
portfolio had an impact on the stability of beta.

Koo and Olson (2007) emphasized the non-viability of CAPM by way of taking 288
sample of companies listed in the New York Stock Exchange. The study took into
account of S & P 500 index as a proxy for market portfolio and found that this market
model of beta was not relevant in measuring the market risk and thereby the expected
return derived by way of including the market model of beta was no longer applicable in
the New York Stock Market.

31
Manjunatha and Others (2007) made an attempt to find out the relevance of CAPM in
Indian context. The study measured the intercept and beta by way of taking into account
of 66 companies listed in BSE from the year 1990 to 2005 spanning of 15 years. The
study found that the intercept was not significantly different from zero indicating that the
scrips did not fetch required rate of return mandated by CAPM and also the the size of
the companies were not ready to explain the variation in portfolio returns resulted the
beta and the size factor did not have any role to play in tandem with CAPM.

Sangeetha and Dheeraj (2007) made an attempt to find out the relation among the
return of the scrip, market information and accounting information. They wanted to
study the influence of market information on return of the scrip was high or the influence
of accounting information was high on the scrip’s return. They collected the information
on the basis of monthly data pertaining to various sectors from BSE during the year 1999
to 2006.The study used regression model to find the significant impact of accounting
information and market information on scrip’s return and found that the market
information made significant influence whereas the accounting information had no
impact on return of the scrip.

Irala (2007) worked with the sample of 660 firms during the period of 1994 to 2006 and
found evidence of instability in their beta value.

Singh (2008) examined betas of 159 stocks for the period 1991 to 2002 to study the
computational effects of the intervals between the data points, the time period over
which the beta is calculated and the size of the portfolio. Considerable variations were
found according to the methods used for calculation.

The study conducted by Singla (2008) tried to examine the validity of CAPM in Indian
market in which he traced 320 scrips spanning of 6 years from BSE. The study tested the
concept of CAPM such that the return mandated by CAPM depends on the level of beta
of the scrip. In this study it was found that higher level of return was reflected with
higher level of risk resulted into the proof of validity of CAPM in Indian market.

32
Ahmed (2008) made an attempt in his study to find out the causal relationship between
stock price and various economic factors on the basis of assumption of the economic
variables might be the cause of determining price of the scrip with respect to Indian
economy. The data were collected covering 12 years on the basis of quarterly
information. The study used Indian Industrial Production, exports, foreign direct
investment, money supply and as a proxy for economic variables and sensex was taken
for the proxy of market return. The study found that the variable sensex was the cause
for identified economic variables whereas the economic variables were not the source of
cause for sensex with the help of Granger Causality tests.

The study of Singhania (2008) made an attempt to find out the predictors of price of
equity in Indian market and for the purpose of the study the researcher took a sample of
51 companies covering seven years data from BSE .The study identified key variables in
influencing the scrip price and used multiple regression to ascertain the influence of key
variables on market price of the scrip. By applying regression model it was found that
the variables like book value, earning per share and price earning ratio had their t values
at 1% level of significance indicated that the variables influenced the market price of the
scrip to a larger extent. The study also revealed that dividend cover and dividend yield
had no impact on the scrip’s price.

Robert Gay (2008) examined the relationship between the macroeconomic variable and
the Stock market return. The study analyzed with respect to four emerging companies
such as Brazil, Russia, China and India by way of identifying the intervening variables.
The study used ARIMA model to find the influence of intervening variables on Stock
market return and further the study concluded that there was no significant relationship
between the intervening variables and the Stock market return.

33
Hassan and others (2008) tested the applicability of CAPM in Malaysian market by
way of taking 150 samples from the service sector during the period of 1995 to 2006
with the span of 11 years. The study found that the association between the higher risk
and higher return was established and confirmed that the market followed the path of
CAPM.

Gulnur and Sheeja (2008) investigated the effect of leverage on Stock Price return for
which the study analysed 792 companies listed in the London Stock Exchange. The
study was conducted on the basis of the assumption that higher the leverage higher the
return but to contrary the result of the study showed that the leverage had a negative
impact on scrip return.

Singh .R (2008) emphasized that beta was the best measure to find out the systematic
risk and the same concept of beta was used by finance practitioners to arrive at capital
budgeting techniques, portfolio formation and performance evaluation. The study tested
the stationary of beta over time to identify the factors that helped to forecast the stability
of beta. The study applied bull and bear market phases to test the co-movement of scrip
return and market return with respect to individual stocks and portfolios. The study
undertook 158 individual stocks and 15 portfolios in the Indian stock market over 12
years from 1991 to 2002. The study used the tools like regression analysis, paired t-test
and correlation analysis. The result of the regression analysis indicated that alpha and
beta were not significantly different for majority of the individual stocks and portfolios
during the alternating market phases. The result of paired t-test showed the evidence of
non-stationarity in some of the alternating periods and stationarity between all bull
periods. The result of the correlation between pairs of periods was high and significant.

Vanitha (2009) examined the relationship between certain company fundamental

variables and the market price of the scrip. The study identified size, leverage, price
earning ratio and book to market equity ratio and the identified variables were then
regressed with the return of the scrips collected from 455 companies listed in BSE with
the span of 10 year period. The result showed that the size and price earning ratio had

34
positive impact whereas debt equity ratio and book to market equity ratio had negative
impact on scrip’s return in Indian context.

Kumar and Gupta (2009) made an attempt to investigate the pattern of volatility in
Indian stock market and to meet out the purpose they tested a sample of 29 companies
on the basis of daily closing price traded in NIFTY from the period of 1996 to 2007 with
the span of 12 years and they found that the companies taken for the study were highly
volatile.

Broca (2009) wanted to investigate the distribution of return with respect to various
scrips in Indian context. The study made an attempt to explore the occurrence of return
distribution in the form of normal or non normal with the help of normality test. The test
revealed that the return distribution had more of non normal characteristics resulted into
severe leptokurtosis and slight negative skewness.

Dwi and Others (2009) made an attempt to find out the influence of accounting
information on stock return and therefore the study used multiple regression by way of
identifying financial ratio, firm size and cash flow as independent variable and stock
return as dependent variable. The result of the study showed that there was a
considerable impact of the above key variables in determining the stock return.

Hasan Ali and Habibolah (2010) tested the risk return relationship by way of taking 74
companies as sample size in Tehran Stock Exchange during the period of 2003-2005.
The study examined the characteristics of the return in terms of Skewness and Kurtosis
to find out the distribution of return series. As far as the study is concerned, the effect of
Kurtosis did not show any significant relation with the return during the study period
whereas the Skewness showed the important effects on returns. The study further
explored that the relationship between beta and return was found to be non-linear.

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Kapil and Sakshi (2010) made an attempt to explore the presence of validity of CAPM
theory in Indian stock market. In order to test the applicability of CAPM in Indian
context the study undertook the research in BSE 500 by identifying 278 companies and
the return of the companies were computed and the same return was regressed with
market return to arrive the beta value with which the association could be ascertained in
terms of risk and return. The study found that higher risk was not commensurate with
high return indicating that the theory of CAPM was discounted in Indian context.

Similar study was carried out by Madhu and Tamimi (2010) to investigate the validity
of CAPM in Indian context by analyzing the drug industry comprising 60 companies
from BSE during the period from 2001 to 2007. The result of the study brought to light
that there was a proof indicating that the theory of CAPM was applicable in Indian
context.

Mazen Diwani (2010) put forth a study with respect to viability of CAPM in emerging
market in which the study selected India as one of the emerging markets and tested the
theory in BSE by taking 28 companies during the period from November 2004 to
October 2009.The study found that the question of applicability of CAPM in Indian
market was still alive.

Kapil Chowdhry (2010) tested the validity of CAPM for the Indian stock market. The
study took 278 companies of BSE 500 from January 1996 to December 2009. In this
study, it was found that there was no support evidence in proving the relationship
between higher risk and higher return. The study explored the reason for portfolio
combination to mitigate the firm specific part of risk and thereby diversification helped
to reduce the unsystematic risk. The result obtained by the study proved to certain extent
that CAPM equation could be regarded as explanatory equation of security returns. As
far as CAPM is concerned, the intercept should approach very close to zero and the
slope should provide excess return on market portfolio. But the study did not find the
support of evidence on the ground of above facts and in contrast there was evidence in
disproving the viability of CAPM in Indian context. In addition to that, the study

36
conducted the test to investigate whether the CAPM captured all the aspects of reality by
including residual variance of the stocks. The result obtained by the test conducted for
the above same duration of the period did not clearly reject CAPM. In the light of the
above findings, the study concluded that beta is not sufficient to determine the expected
returns on securities or portfolios.

Basu .D and Chawla .D (2010) traced the studies related to the validity and efficiency
of Capital Asset Pricing Model (CAPM) in different market structure. The study found
that majority of the CAPM test was applied in developed market, resulting in a dearth of
such test in emerging markets like India. The study was undertaken on the assumption
that emerging markets so far were analyzed in less numbers but there could be a chance
of bringing more interesting facts from the above markets. Hence they made an attempt
to study the viability of implementing CAPM test in India. For the above valid reason,
the study examined ten portfolios covering fifty stocks over five year period from the
year 2001 to 2006 to verify the efficiency of CAPM in Indian market. The study
revealed that CAPM was a failure model as far as Indian market was concerned. The
study applied the tool of regression and it was found that the intercept terms were all
significant for all ten portfolios against the expectation of zero intercept. The study also
pointed out that the negative relation was existed between the beta and excess return
indicating inefficient capital market. Apart from this, the regression had less R^2 value
and the study concluded on the above facts that CAPM was not suitable descripor of
asset price in India.

K.V. Aruna Shanta (2010) investigated the stability of beta over the time in different
market phases from 2000 to 2009. The study estimated the beta for five sub periods of
two years each and one bullish market phase with one more bearish market phase. The
stability was tested with the help of time variable regression and dummy variable
regression. The result showed that in most of the cases i.e. 80% of the scrips did support
the null hypothesis leading to infer that stability of beta over time and market phases was
not rejected by both of the econometric methods. From the study, there is less ground to

37
conclude that beta values are not stable over the time and market phases in Sri Lankan
Stock Market.

Soumya Guhadeb & Sagarika Misra (2011) found that there was evidence of
instability of betas especially in the shorter time period and the instability was reduced
when the beta estimation period increased. In addition to that the extreme betas showed
the higher stability than the intermediate range of betas.

Murthy Jogalapuram (2012) found that among the various return interval periods, half
year return shows low risk and high return.

Balakrishnan & Rekha Gupta (2012) showed that most of the portfolio betas were not
regressed to the value one and also they proved the individual securities beta and
portfolio betas are not related to each other.

Harish S.N. and T.Mallikarjunapa (2014) tested whether the betas were stable across
the time or not. The study took data for 14 years from 2000 to 2014. Three portfolios
were constructed to know the stability of beta. The study adopted the Chow test to
investigate the impact of sub prime crisis of 2008 on beta stability. The structural break
test showed that subprime crisis had an impact on 47% of the stocks whereas 53% of
stocks did not undergo any impact on account of subprime crisis. By using Chow test,
the study additionally found that the portfolio betas were less influenced in terms of
subprime crisis compared to individual securities betas which were influenced at high
level. The study further explored with the help of WD max and UD max and it was
found that almost 70% of the betas had no structural break. Since the individual stock
encountered with higher structural breaks, the impact of individual stocks on portfolio
was high. Hence the beta stability on portfolio was somewhat adverse.

A.K.Dubey (2014) made an attempt in analyzing time scale dependence of systematic

risk of stocks for an emerging market economy. The result of the study showed that the
betas were more or less instable in terms of different trading stocks at different
investment horizons. The study was undertaken on the basis of the characteristics of the

38
heterogeneous investors with different investment horizons. In this study, it was stressed
that holding different stocks by trading classes varied due to the time horizon of
investment and perception of the risk. The study emphasized the conditions of business
are very fluid i.e. the rate of change takes place in the phase of organization as fast as
possible. By taking the above statement into account, the study followed the assumption
of the dynamic risk which is having more of association with developed market. The
same assumption will not hold true in the emerging economy like India. The study
revealed that time scale dependent estimates of systematic risk embedded in different
stocks and the tools used in the study will give insight to the practitioners while portfolio
planning.

Research Gap
Most of the studies emphasized the relationship between risk and return. Since beta co-
efficient is the most important parameter to estimate the expected rate of return under
Capital Asset Pricing Model (CAPM), it becomes vital to estimate the beta co-efficient
and its stability in Indian context because Indian Stock Market is emerged as Second
best market in the world. Earlier studies questions the stability of beta in foreign market
and very few studies were conducted in Indian Market. Hence the study makes an
attempt to find the stability of beta through Ordinary Least Square Method and its
reliability.

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