Risk Factors in Indian Capital Market-Thimmarayappa-04117

Risk Factors In Indian Capital Markets
A RESEARCH REPORT
ON
“Risk factors in Indian capital market”
Submitted in partial fulfillment of the requirements of

the M.B.A Degree Course of Bangalore University
Submitted By
THIMMARAYAPPA.S.M
(REGD.NO:04XQCM 6111)
Under the Guidance and Supervision
Of
PROF. B.V.RUDRA MURTHY
M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
# 43, Race Course Road, Bangalore-560001
2004-2006
1 M.P Birla Institute of Management

Declaration
I hereby declare that this report titled “Risk factors in Indian capital
market” is a record of independent work carried out by me, towards the partial
fulfillment of requirements for MBA course of Bangalore University at M.P.Birla
Institute of Management. This has not been submitted in part or full towards any
other degree.
PLACE: BANGALORE
DATE: THIMMARAYAPPA.S.M

Principal’s Certificate
This to certify that this report titled “Risk factors in Indian capital
market” have been prepared by THIMMARAYAPPA.S.M bearing the
registration no.04 XQCM 6111 under the guidance and supervision of PROF.
B.V.RUDRA MURTHY ,MPBIM, Bangalore.
Place: Bangalore Principal
Date: (Dr.N.S.Malavalli)

GUIDE’S CERTIFICATE
This is to certify that the Research Report entitled “Risk factors in Indian
capital market”, done by THIMMARAYAPPA.S.M bearing Registration
No.04 XQCM 6111 is a bonafide work done carried under my guidance during
the academic year 2005-06 in a partial fulfillment of the requirement for the
award of MBA degree by Bangalore University. To the best of my knowledge this
report has not formed the basis for the award of any other degree.
Place: Bangalore PROF.B.V.RUDRA MURTHY

Date :

ACKNOWLEDGEMENT
I am thankful to Dr.N.S.Malavalli, Principal, M.P.Birla institute of

management, Bangalore, who has given his valuable support during my project.
I am extremely thankful to PROF.B.V.RUDRA MURTHY, M.P.Birla institute

of Management, Bangalore, who has guided me to do this project by giving
valuable suggestions and advice.
I equally thank Dr T.V.N Rao for his guidance and suggestion.
Finally, I express my sincere gratitude to all my friends and well wishers who
helped me to do this project.
THIMMARAYAPPA.S.M

TABLE OF CONTENTS
CHAPTER PARTICULARS
ABSTRACT
1. INTRODUCTION
CAPM (capital asset pricing model).
CAPM in Indian context.
CAPM and Indian stocks.
Criticisms of CAPM
Back ground of the study
2. REVIEW OF LITERATURE
Risk factors in developing capital markets: Lakshman alles & Louis
Murray
Structural change and asset pricing in emerging markets: Rene Garcia,
Eric Ghysels
Distributional characteristics of emerging markets returns and asset
allocation: Geert Bekaert, Claude B. Erb, Campbell R, Harvey and Tadas
E. Viskanta.
Skew ness preference and the valuation of the risk assets:
Alan Kraus & Robert H Litzenberger
Equilibrium in an imperfect market: A constraint on the number of
securities in the portfolio : Haim Levy
Common risk factors in the returns on stocks and bonds:
Eugene F. Fama & Kenneth R .French
Tests of the Fama and French model in India: Gregory Connor and Sanjay
Sehgal
Relationship between return and market value of common stocks: Rolf w
Banz
3. METHODOLOGY
Problem statement
Objectives of the study
Scope of the study
Limitations of the study
Data
Sources of data
Period of study
Sample
Sample size
Statistical procedure
Back ground of regression
Hypothesis
Scatter diagrams
4 DATA ANALYSIS
5 CONCLUSION
GLOSSARY & BIBLIOGRAPHY

LIST OF TABLES
TABLE NO TABLE NAME
1 Showing return, beta, variance and skew ness for the year 2002.
5 Showing co efficient of beta
6 Showing co efficient of variance
7 Showing co efficient of skew ness
8 Showing co efficient of beta and variance.
9 Showing co efficient of beta and skew ness
10 Showing co efficient of beta, variance and skewness.

Abstract
This project addresses the question as to whether the Capital Asset Pricing Model
(CAPM) offers an appropriate explanation of stock returns in the Indian capital markets.
The question is whether the CAPM is appropriate, given potential relevance of
unsystematic risk of market distortions, thin trading and its related effects on market
price. Arguments for considering additional factors like variance, skew ness in pricing
models to better deal with such situations are presented. Using BSE 100 stock returns
data for financial years 2002 to 2005, a series of empirical tests examine whether these
factors, in a cross sectional regression model, offer a statistically significant explanation
of company returns.


Introduction
Capital asset pricing model always referred to as CAPM, is one of the most
popular model used for in applications, such as estimating the cost of the capital for firms
and evaluating the performance of the managed portfolios. It is the center piece of MBA
investments courses. The attraction of the CAPM is that it offers predictions about how to
measure risk and the relation between expected return and risk.
The CAPM builds on the model of portfolio choice developed by Harry Markowitz
(1959). Sharpe (1964) and Lintner (1965) add two key assumptions to the Markowitz
model to identify a portfolio that must be mean-variance-efficient.
The first assumption is, given market clearing asset prices at t-1, investors agree
on the joint distribution of asset returns from t-1 to t. And this distribution is the true one,
that is, the distribution from which the returns we use to test the model are drawn.
The second assumption is that there is borrowing and lending at a risk free rate,
which is the same for all investors and does not depend on the amount borrowed or lent.
The set of assumptions employed in the development of the CAPM are follows:
1. Investors are risk-averse and they have a preference for expected return and a
dislike for risk.
2. Investors make investment decisions based on expected return and the

variances of security returns, i.e. two-parameter utility function.
3. Investors behave in a normative sense and desire to hold a portfolio that lies
along the efficient frontier.

4. There exists a risk less asset and investors can lend or invest at the risk less rate
and also borrow at this rate in any moment.
5. All investments are perfectly divisible. This means that every security and
portfolio is equivalent to a mutual fund and that fractional shares for any investment can
be purchased in any amount.
6. All investors have homogenous expectations with regard to investment

horizons or holding periods and to forecasted expected returns and risk levels on
securities. This means that investors form their investment portfolios and revise them at
the same interval of time. Furthermore, there is complete agreement among investors as
to the return distribution for each security or portfolio.
7. There are no imperfections or frictions in the market to impede investor buying

and selling. Specifically, there are no taxes or commissions involved with security
transactions. Thus there are no costs involved in diversification and there is no
differential tax treatment of capital gains and ordinary income.
8. There is no uncertainty about expected inflation; or, alternatively all security

prices fully reflect all changes in future inflation expectations.
9. Capital markets are in equilibrium. That is, all investment decisions have been
made and there is no further trading without new information.
According to CAPM
1. The risk of the project is measured by beta of the cash flow with respect to the
return on the market portfolio of all assets in the economy.
2. The relation between the required expected return and the beta are linear

According to CAPM equation,
E (Ri) = Rf + [E (RM)-Rf] β IM
Where,
Rf is the risk free rate of return.

Rm is the market return.
E (Ri) expected rate of return.
β IM systematic risk of market.
E (Rm)-Rf is the risk premium.
Beta as a Measure of Systematic Risk
An asset exhibits both systematic and unsystematic risk. The portion of its
volatility which is considered systematic is measured by the degree to which its returns
vary relative to those of the overall market. To quantify this relative volatility, a
parameter called beta was conceived as a measure of the risk contribution of an
individual security to a well diversified portfolio:
βA= COV (RA, RM)/ σ2M
Where,
RA is the return of the asset.
Rm is the return of the market.
σ2M is the variance of the return of the market, and

Cov (RA, Rm) is covariance between the return of the market and the return of the asset.
In simple words beta is the ratio of the expected excess return of an asset relative
to the overall market’s excess return, where excess return is defined as the return on any
given asset less the return on a risk-free asset.

In practice, beta is calculated using historical returns for both the asset and the
market, with the market portfolio being represented by a broad market index like nifty
index, bse index, nifty junior etc.
One of the important outcomes of the CAPM assumptions is that all investors
hold a portfolio which is a combination between risk less portfolio and market portfolio.
This is because all investors will have identical efficient frontiers due to the assumption
of homogeneous expectations. They can however have different utility functions, which
will decide what combination of risk less portfolio and market portfolio the investor will
choose. This implies that all investors hold the same combination of risky securities
namely, the market portfolio. This is also known as the separation theorem.
The market portfolio in CAPM is the unanimously desirable risky portfolio which
contains all risky assets. Thus return on market portfolio is weighted average of return of
all risky assets in the market and in theory it should contain, besides ordinary shares, all
assets, like art objects, commodities, real estates and so on.
The total risk of a portfolio can be measured by the variance of its return. In a
more general situation of a portfolio p consists of n shares and any individual share i has
a weightage of Xi in the portfolio, then the total risk can be expressed as follows:
σ2p = σ2ep + βp2 σ2m

Total Risk = Unsystematic Risk + Systematic Risk
If CAPM holds, then investors should hold diversified portfolios and the
systematic risk or non-diversifiable risk will be the only risk which will be of importance
to the investors. The other part of the risk, known as the diversifiable risk or unsystematic
risk will be reduced to nil by holding a diversified portfolio. Thus beta, which is a
measure of the non-diversifiable risk in a portfolio, is most important for investors, from
the point of view CAPM theory.

In case the CAPM holds in the market, an investor will no longer require any
sophisticated portfolio selection technique to select his portfolio. He will choose a mix
between risk-free rate and the market portfolio based on his utility function.
In other words optimal investment decision will be simply to buy the market
portfolio. This investment decision is independent from the decision about how to finance
the investment i.e. whether to lend or borrow at the risk-free rate. Ideally, if CAPM holds,
there will not be any identifiable inefficiency in the market and all securities will lie on
the security market line.
The graphic relationship between expected return on asset i and beta is called the
security market line. If CAPM is valid, all securities will lie in a straight line called the
security market line in the E(R), βi frontier. The security market line implies that return is
a linearly increasing function of risk. Moreover, only the market risk affects the return
and the investor receive no extra return for bearing diversifiable (residual) risk.
Essentially, the CAPM states that an asset is expected to earn the risk-free rate
plus a reward forbearing risk as measured by that asset’s beta. The chart below
demonstrates this predicted relationship between beta and expected return – this line is
called the Security Market Line.

The security market line (SML) provides a bench mark for the evaluation of
investment performance. Given the risk of an investment, as measured by its beta, the
SML provides the required rate of return necessary to compensate investors for both risk
as well as the time value of money.
Suppose the SML relation is used as a bench mark to assess the fair expected
return on a risky asset. Then security analysis is performed to calculate the return actually
expected. If a stock is perceived to be under priced, it will provide an expected return in
excess of the fair return stipulated by the SML. Under priced stocks therefore plot above
security market line: given their betas, their expected returns are greater than dictated by
the CAPM. Over priced stocks plot below the security market line. The difference
between the fair and actually expected rates of return on a stock is called the stock’s
alpha, which is denoted by α.
Some of the other uses of the CAPM are it helps in the capital budgeting
decisions. For a firm considering a new project, the CAPM can provide the required rate
of return that the project needs to yield, based on its beta, to be acceptable to investors.
Managers can use the CAPM to obtain the cutoff internal rate of return (IRR) or the
hurdle rate for the project.
Extensions of CAPM
The assumptions that Sharpe is considered to be unrealistic, so many financial
economists have worked to extend the model to more realistic situations. The following is
the extended model THE CAPM WITH RESTRICTED BORROWING: THE ZERO
BETA MODEL and other models.

CAPM in Indian context

The recent study CAPM in Indian context is worth while to consider given that
the project is about testing CAPM in Indian capital markets. So we get the back ground
as to the applicability of the CAPM in the Indian context. One of the assumptions of
CAPM is that there are no imperfections in the market (or) in other words the market is
efficient, however the study has identified some the important factors which may cause
CAPM to be ineffective in the Indian context and has the potential to reduce the
efficiency level of the Indian Capital Market. (R Vaidyanathan)
The following are the factors identified:
1) Non-Diversified Portfolio Holding

Indian Share Owners -A Survey, L.C. Gupta, clearly indicates that the average
investor in India holds very few scrips in their portfolio. This goes directly against the
expectations of CAPM where the investors are expected to hold a combination of risk-
free asset (or zero beta assets) and market portfolio. The investors are not expected to
hold an undiversified portfolio as they are not rewarded for bearing unsystematic risk
according to CAPM. Hence, holding small number of securities or undiversified
portfolios can add to market inefficiency.
2. Liquidity
Liquidity is possibly the most serious problem faced by the Indian investors. A
consultative paper by SEBI indicated a poor liquidity situation at the stock exchanges in
India. Lack of liquidity can violate the assumptions of CAPM in two ways. Firstly it
results in a transaction cost for the investors. If the transaction cost is added to the CAPM
model, there will be a price band around the SML in which the scrips can lie. Within this
band, it will not be profitable for investors to buy or sell shares.

Secondly, CAPM assumes that all assets are infinitely divisible and readily
marketable. This assumption is also violated in India, due to the low liquidity observed in
majority of the shares, as discussed earlier. Low liquidity can also result in inefficient
pricing of scrips and price setting behavior by investors (non-price taker).
3. Insider Trading
Insider trading is believed to be rampant in the Indian market. The lack of
transparency in the trading system facilitates insider trading. Earlier there was virtually
no law against insider trading. After SEBI was formed, it has taken several steps to
protect the small investors and prevent insider trading. However, the task of detecting
insider trading is a difficult one.
4. Lack of Transparency
Indian stock markets suffer from lack of transparency between members and
constituents. Members perceive that the prices of transactions are not properly reflected
in their gains. All intra-day quotations are not readily available. Since exact time of the
transaction is not known, disputes persist. Also it is felt that some transactions are not
reported. In such a context any analysis has to consider the limitations of available price
series.
5. Inadequate Infrastructure
The infrastructure in the stock markets in India is woefully inadequate. The stock
exchanges are faced with inadequate office space, lack of computerization and
communication system, etc. These inadequacies in turn have affected the quality of the
investor service provided by the members of the exchanges. Though the number of
investors as well as the volume of transaction has gone up many folds in recent years, the
basic infrastructure and system has almost remained unchanged.
The lack of infrastructure adds to the transaction cost of the investors. Moreover
inadequate infrastructure and delays in settlement can slow down the absorption of price
sensitive information in the market, affecting its overall efficiency. Both increased
transaction cost and low operational efficiency violates the assumptions of CAPM

CAPM and Indian stocks

Since we are testing the CAPM in Indian capital markets, so as to determine
whether it offers a better explanation of company returns, let us have the back ground of
the study CAPM and Indian stocks (C u Rao, Golaka c nath and Manish Malhotra).
The study aimed at measuring returns and risks of the representative sample of
Indian stocks. The study also explored different issues regarding application of CAPM in
calculating stock market risk measure, beta.
It was found that the time internal choice did not have any significance impact on
calculated values of beta, but the choice of market proxy could significantly change the
values of beta .It was found that the betas bear linear relationship with mean quarterly
returns . The study suggests that this factor can’t be treated as proof of validity of CAPM.
The plotting of security market line revealed the majority of stocks under analysis are not
rewarded investors appropriately.
Criticisms of CAPM
The various assumptions of the CAPM model are considered to be unrealistic:
1. There is no transaction cost, but there is evidence that at least a minimum

transaction cost exists.
2. Investors have homogenous expectation but empirical evidence have

shown that the investors have different expectations, leading to different
capital lines and no general equilibrium pricing model. This is the major
empirical problem of the CAPM.
3. There are no imperfections in market, but the imperfections are exhibited

by the markets.

4. The investors hold all the assets included in the market port folio, the
various studies has shown that it is impossible to determine a market
portfolio or market proxy which contains all assets.
5. There are no taxes, but most studies have shown that tax effects via the
dividend yield are important in the pricing process. In particular, there is
a positive relationship between dividend yields and average returns.
6. Investors make investment decisions based on expected return and the

variances of security returns, but the evidence indicate skew ness is also
important in asset pricing. Whenever the market portfolio is positively
(negatively) skewed, investors are willing to accept a lower average return
in exchange for positive skew ness with the market portfolio.
Apart from assumptions, according to CAPM beta is the measure of systematic risk, but
beta may not be the correct measure of systematic risk.
There may be other measures of systematic risk also. Besides macroeconomic

variables, some successful proxies for systematic risk include a firm’s size (as measured
by, for example, its market capitalization), its price/earnings ratio, and its market/book
ratio. All these are all firm-specific variables, which is not what the CAPM would
predict. The consequence of not measuring systematic risk correctly we will not
accurately predict a company’s risk premium. Much empirical evidence in this regard is
found.
Estimated betas are considered to be unstable. Major changes in a company

affecting the character of the stock or some unforeseen event not reflected in past returns
may decisively affect the security's future returns.

Other criticisms of Beta are, it can be easily rolled over. Richard Roll has
demonstrated that by changing the market index against which betas are measured, one
can obtain quite different measures of the risk level of individual stocks and portfolios.
As a result, one would make different predictions about the expected returns, and by
changing indexes, one could change the risk-adjusted performance ranking of a manager.
This is in consistent with the results which were found in the study CAPM and Indian
stocks. There also the study suggested that with changing of the market proxy the value
of betas also significantly changed.
Beta is a short-term performer. Some short-term studies have shown risk and
return to be negatively related. For example, Black, Jensen and Scholes found that from
April 1957 through December 1965, securities with higher risk produced lower returns
than less risky securities
Theory does not measure up to practice. In theory, a security with a zero beta
should give a return exactly equal to the risk-free rate. But actual results do not come out
that way, implying that the market values something besides a beta measure of risk.
However, what ever the flaws one can find in the CAPM model, it is one of the
model which is still popularly used in the academics, as mentioned in the introduction,
that the CAPM model is the center piece of the MBA investment courses. It is considered
that unrealistic assumptions can be relaxed, leading to different versions of the CAPM.
1. Inclusion of skew ness (third moment) in the pricing model has led to the
three moment CAPM.
2. Different borrowing and lending rates lead to different CAPM lines and no
general equilibrium pricing model.

3. No risk less asset exists, leading to the zero beta CAPM, which provides
for a theoretical explanation of the basic CAPM empirical results.
4. Consideration of taxes leads to an alternative CAPM model that

incorporates the differential tax effects of dividends and capital gains.
5. There is risk less lending but no risk less borrowing, leading to the zero
betas CAPM.
The CAPM model does not consider the additional factors:
It is certain that there are a variety of risk factors facing companies today. Some
of these factors are market risk, bankruptcy risk, currency risk, supplier risk, etc, and it is
known that the CAPM uses a single factor to describe aggregate risk. Effectively,
additional factors allow more specific attribution of the risks to which a company is
exposed, but CAPM considers only one factor that is the beta.
The attraction of the CAPM is that it offers powerful and intuitively pleasing
predictions about how to measure risk and the relation between expected return and risk.
Unfortunately, the empirical record of the model is poor enough to invalidate the way it is
used in applications. The CAPM’s empirical problems may reflect theoretical failings,
the result of many simplifying assumptions.
Empirical evidence mounts that much of the variation in expected return is

unrelated to market beta. First is Basu’s (1977) evidence that when common stocks are
sorted on earnings-price ratios, future returns on high E/P stocks are higher than predicted
by the CAPM. Banz (1981) documents a size effect; when stocks are sorted on market
capitalization (price times shares outstanding), average returns on small stocks are higher
than predicted by the CAPM.

Bhandari (1988) finds that high debt-equity ratios (book value of debt over the
market value of equity, a measure of leverage) are associated with returns that are too
high relative to their market betas. Statman (1980) and Rosenberg, Reid, and Lanstein
(1985) document that stocks with high book-to-market equity ratios have high average
returns that are not captured by their betas.
Fama and French (1992) update and synthesize the evidence on the empirical
failures of the CAPM. Using the cross-section regression approach, they confirm that
size, earnings-price, debt-equity, and book-to-market ratios add to the explanation of
expected stock returns provided by market beta.
Chan, Hamao, and Lakonishok (1991) find a strong relation between book-to-
market equity (B/M) and average return for Japanese stocks. Capaul, Rowley, and Sharpe
(1993) observe a similar B/M effect in four European stock markets and in Japan. Fama
and French (1998) find that the price ratios that produce problems for the CAPM in U.S.
data show up in the same way in the stock returns of twelve non-U.S. major markets, and
they are present in emerging market returns. This evidence suggests that the
contradictions of the CAPM associated with price ratios are not sample specific.
In the light of above, in this project we are testing whether the CAPM offers a
better explanation of the company returns in Indian capital markets or can we find
evidence of the other factors giving better explanation of the company returns in Indian
capital markets.


Lakshman Alles & Louis Murray:”Risk factors in developing capital markets”

2003, Annual conference of global finance association.
The purpose of this project is to explore alternative explanations of the risk

/reward relationship, in the developing capital markets .It is likely that these markets will
be characterized by various inefficiencies, which will impact on the relationship that is
implied by the capital pricing asset model.
This paper address the question as to whether the CAPM offers an appropriate
explanation of the company returns in less developed capital markets .The question is
whether the CAPM is appropriate, given the potential relevance of unsystematic risk,
Market distortions and of thin trading and its related effects on the market price.
Arguments for considering additional factors in pricing models to better deal with such
situations are presented.
The Methodology used is:

1) Single factor regressions
Average annual daily returns for each company are regressed on the different
measures of risk that is the beta, variance, skew ness, co skew ness.
2) Multiple factor regressions
Three alternative formulations of these tests are
Model 1: Ri = α + Betai[b1] + Variancei[b 2] + ei ,
Model 2: Ri = α + Betai[b1] + Skewnessi[b3] + ei
Model 3: Ri = α + Betai[b1] + Variancei[b 2] + Skewnessi[b3] + ei
Model 4: Ri = α + Betai[b1] + Variancei[b 2] + Coskewnessi[b 4] + ei

The analysis of above regression tests are:
Single factor regressions results:
They confirm the importance of beta, as coefficients of beta are significant in
most cases. It is interesting to note that Sri Lanka, the smallest market, provides the only
exception. Beta values do not offer a significant explanation of average daily returns.
Multiple regressions results:

If Model 1 is considered, it is difficult to identify a dominant explanatory factor.

If Model 2 is considered there is significant relation between company’s return and skew
ness. In Model 3, for most markets, when used in combination with beta, and with each
other, both variance and skew ness remain significantly related to company returns.
In Model 4 the coefficient estimates of the co skew ness variable are significantly
different from zero in at least one of the sub-periods examined in each market.
To conclude, they provide some evidence that, apart from beta, other measure of risk may
also be important in the group of developing markets .variance, and to a lesser extent co
skew ness, offer a more significant explanation of returns in these markets.
Garciaa, Rene, Ghyselsb, U Eric (1998) “Structural Change and Asset Pricing in
Emerging Markets” Journal of International Money and Finance, Vol. 17, pp. 455-
473.
This paper documents the importance of testing for structural change in contexts
of emerging markets. Typically asset pricing factor models for emerging markets are
conditioned on world financial markets factors such as world equity excess rut urns, risk
and maturity spreads as well as other variable.
They show that more may country one cannot reject the model according to one
usual chi square test for over identifying restrictions but they reject it on the basis of
structural change tests, especially when international factors are considered. In this paper
much better support and greater stability are found. When a local CAPM is tested it sized
ranked portfolios. Also some evidence of small size effect persists for some countries.
The methodology applied in this paper is as follows:

They have applied test for structural stability to two leading conditional factors
models: conditional CAPM, conditional factors models on a set of sized portfolio for
each country. These models have been estimated via the generalized method of moments.
They have estimated these models for the following set of markets:
Argentina, Brazil, Chile, Mexico, Korea, India, Thailand, Greece, Jordan and Zimbabwe.

To asses these models the following tests are used.

1) J-test
2) Supremum Lagrangian multiplier test
To conclude, for the conditional world CAPM and conditional local and US factor
model test for structural stability of the GMM parameter estimates show that for most
countries and portfolios according to the case, although we cannot reject the model on the
basis of the over identifying restrictions criterion, the rejection of the absence of
structural change is quite strong. This is quite reasonable if one considers both political
and economical factors that have disrupted these emerging markets in comparison with
world events. This rejection means that the model yields a systematic mispricing of risk
factors.
A much more stable relationship is found however in a simple local CAPM model
for size ranked portfolios, although the small size effect appears to be present in a number
of countries. They show the empirical evidence that the emerging stock markets is also
dependent on structural changes.
Bekaert, G, C Erb, C Harvey, and T Vishkanta (1998), “Distributional

characteristics of Emerging Market Returns and Asset Allocation” The Journal of
Portfolio Management, Vol. 24, pp. 102-116.
They argue that the standard mean variance analysis some what problematic and
with respect to emerging markets. They argue that in this analysis investor care about
expected returns variance and co variances but emerging market returns cannot be
completely characterized by these measures alone. They show that there is significant
skew ness and kurtosis in these returns.
They have tested for non normality of returns in emerging markets and they found
evidence in one of the emerging market (Argentina), that the returns are non normal.
They analyze time varying returns characteristics, which are the skew ness and kurtosis.

They undertake to test whether the 1990’s is different from 1980’s for that they
have used chow test and found that there was a little evidence that mean returns are
significantly different, there is substantial evidence that volatility changed in 1990’s,
there is also evidence that the skew ness in returns changed in 1990’s and kurtosis is
similar to skew ness.
They have explained the fundamental characteristics of emerging market returns.
Then they have mentioned about higher moments and asset allocation .Here they have
looked at the impact of skew ness and kurtosis on asset allocation. They have found that
the emerging markets allocation increases as the skew ness increases up to the level of
1.5.They see that as the level of kurtosis raises beyond 5 the portfolio weight for the
emerging markets increases .hence they conclude that skew ness and the kurtosis impact
the asset allocation.
To conclude, in their research they suggest that it could be a mistake to treat the
emerging markets on par with the developed markets. They report that emerging market
equity index return distributions are highly non normal, in comparison with the
developed market equity index return. They identify significant skew ness and kurtosis in
emerging market return and they obverse the persistence of skew ness over time. They
suggest that investors will have preference for positively skewed investments and they
wish to avoid the negatively skewed distributions .Here one can notice that skew ness
will play an important role in explaining the company returns.
Kraus and Litzenberger (1976) “Skew ness Preference and the Valuation of Risk
Assets” Journal of Finance, Vol. 31, pp. 1085-1099
This paper extends the capital asset pricing model to incorporate the effect of
skew ness on valuation .The empirical evidence presented is consistent with the
prediction of the three moment extension of the traditional CAPM that the intercept is
equal to the risk less rate of interest. The evidence suggest that prior empirical findings
that are interpreted as in consistent with the traditional theory can be attributed to the
misspecification of the CAPM by omission of systematic (non diversifiable) skew ness.

This three moment CAPM model is presented as follows;
R=b0 +β [b1] +γ [b2] +u.
The Methodology used in this paper is as follows:

Stocks were ranked into deciles on the basis of betas and gamma estimates .The
monthly portfolio deflated excess rates of return in each of the subsequent 12 months
(January 1936 through December 1937)were calculated for each of the beta & gamma
decile portfolios. This procedure was repeated for the 120 month periods beginning each
January with the final period being January 1960 through December 1969 .for the final
periods, monthly portfolio returns were available for the subsequent 6 months .in this
way 34.5 years of monthly deflated excess returns from January 1970 through June 1970
for each of 20 portfolios were obtained .
The cross sectional OLS regression is used to estimate the bo,b1,b2.Also cross
sectional simple regression s were run to compare results of fitting the traditional CAPM
or the Vasichek-black or Brennan modifications of it ,with results of fitting the three
moment CAPM.
The Findings of the paper can be summarized as follows:

The results of the cross sectional regressions suggest that the mean intercept is
significantly greater than zero and the mean slope is positive much smaller than the mean
deflated excess rate of return on the market index .There is allows evidence that the
results are consistent with Vasichek-black CAPM with out risk less borrowing. Also
there is evidence that the results are consistent with three moments CAPM.There is also
evidence that higher beta portfolios tend to have more than proportionately higher
gammas .This provides a rationale for the empirical finding that the slope of the capital
market line is lower than predicted by the traditional theory.

To Conclude, investors are found to have an risk aversion to variance and a

preference for positive skew ness .The present paper has shown that when CAPM is
extended to include systematic skew ness, the prediction of a significant price of
systematic skew ness is confirmed and the prediction of a zero intercept for the security
market line in excess return space is not rejected.
Levy, Haim (1978): “Equilibrium in an Imperfect Market: Constraint on the

Number of Securities in the Portfolio” American Economic Review, Vol. 68, pp. 643-
658.
In this paper Levy has tried to narrow the gap between the theoretical model and
the empirical findings by deriving a new version of the CAPM in which investors are
assumed to hold in their portfolios some given no; of securities. He as denoted the
modified model as general capital asset pricing model (GCAPM).
He has relaxed the assumption of a perfect market and hence the k th investors
holds stocks of n companies in his portfolio, where n can be very small i.e. 1, 2 etc.He
has first derived an equilibrium relationship between the return and risk of each security.
He has found that the well known systematic risk of the traditional CAPM beta has little
to do with equilibrium price determination .on the other hand beta * which is a weighted
average of the k th investor systematic risk beta, is the correct measure of the i th security
risk .since variance is a major component of beta, it plays an important role in the risk
measure of each stock, which is contrary to the equilibrium results of the CAPM.
The Methodology applied in this paper is as follows:

The monthly rates of return of a sample of 101stocks traded on the New York
stock exchange were calculated for the period 1948-68 that is for each security there are
240 observations. By using time horizon 2 months, the no: of observations was reduced
to 120. In this paper various linear regressions with monthly data, semi-annual data, and
annual data are examined.

The Findings of this paper is presented as follows:

The empirical findings support the theoretical results. The simple regression of
variance performs much better than the regression of beta. The most important result is of
the regression of the variance & beta, where it was found that the regression co efficient
of the variance was significant, where as the regression co efficient of the beta did not
differ significantly. This confirms that in an imperfect market beta plays no role or at
least a negligible role in price determination.
To Conclude, he has mentioned that the variance plays an important role in the
risk-return relationship, but suggests that it is not the only measure of the i th security
risk. The variance is the only one component in this risk. For securities which are widely
held, beta will provide a better explanation for price behavior, while for most securities,
which are not held by many investors then variance provides a better explanation of the
price behavior.
Fama, Eugene F and French, Kenneth R :( 1993) “Common Risk Factors in the
Returns on Stocks and Bonds” Journal of Financial Economics, Vol. 33, pp. 3-56.
This paper identifies five common factors in the returns on stocks and bonds.
There are three stocks –market factors: an overall market factor and factors related to
firm size and book to market equity.
There are two bond market factors, related to maturity and default risks. Stock
returns have shared variation due to the stock market factors, and they are linked to bond
returns through shared variation in the bond market factors .Except for low grade
corporates, the bond market factors capture the common variation in bond returns. Most
important, the five factors seem to explain average returns on stocks and bonds.

The Methodology used in this can be summarized as follows:

This paper uses the time series regression approach of black, Jensen and scholes
(1972). Monthly returns on the stocks and bonds are regressed on the returns to a market
portfolio of stocks and mimicking portfolios for size, book to market equity and term
structure risk factors in returns. The time series regression slopes are factor loadings that,
unlike size or book to market equity have a clear interpretation as risk factors,
sensitivities for bonds as well as for stocks.
The Findings of the paper were:

The time series regressions for stocks say that size and book to market factors can
explain the differences in average returns across stocks. But these factors alone can’t
explain the large difference between the average returns on stocks and one month bills.
The time series regression for bonds say that the term structure factors also explain the
average returns on bonds, but the average premiums for the term structure factors , like
average excess bond returns are close to zero. The common variation in stock returns is
largely captured by 3 stock portfolio returns and in bond return is largely explained by
two bond portfolio returns.
To conclude, in a nutshell, their results suggest that there are at least three stock
market factors and two term structure factors in returns. Stock returns have shared
variation due to the three stock market factors, and they are linked to bond returns
through shared variations in the two term structure factors. Except for low grade
corporate bonds only the two term structure factors seem to produce common variation in
the returns on government and corporate bonds. There argue that if other variables ,such
as book to market equity, market value, or price earning ratios are considered ,the beta
has no significant influence on the observed returns.

Gregory Connor and Sanjay Sehgal: Tests of the Fama and French model in India:
This paper empirically examines the Fama-French three- factor model for the
Indian stock market. Objectives of the paper are: To test the one- factor linear pricing
relationship implied by the CAPM and the three- factor linear pricing model of Fama and
French, To analyze whether the market, size and value factors are pervasive in the cross-
section of random stock returns, To investigate whether there are market, size and value
factors in corporate earnings similar to those in returns, and whether the common risk
factors in earnings translate into common risk factors in returns.
The Methodology used in this paper can be summarized as follows:
1) Summary statistics on the portfolio returns

Mean, Standard deviation, Skew ness, Excess kurtosis, Auto correlation (ρ1, ρ2 ,ρ3)
2) Correlations between the factor portfolios.
3) Monthly seasonal in portfolio returns.
¾ Estimated differences in mean returns
¾ t-statistics for differences in mean returns
4) Regressions of size and book-to-market sorted portfolio excess returns (Rt) on
combinations of the market (MKT), size (SMB) and value (HML) factor portfolios
5) Constrained estimation of the three-factor model with an excess zero-beta return
6) Growth in earnings for the six size and value sorted portfolios (GE) regressed on
Contemporaneous market (GEMKT), size (GESMB) and value factors (GEHML) in
the growth in earnings.
7) Annual portfolio excess returns (R) regressed on portfolio specific growth in earnings
(GE) one year ahead.
8) Annual portfolio excess returns (R) regressed on market (GEMKT), size (GESMB)
and value (GEHML) factors in the growth in earnings one year ahead.

The findings of this paper can be summarized as follows:
Fama and French offer three central findings in support of their three- factor Asset-
pricing model that are pervasive market, size and value factors. This paper examines
these three central findings on the Indian equity market. They confirm the first two of
them, but cannot draw a reliable conclusion on the third. They view their findings as
generally supportive of the Fama-French model applied to Indian equities.
To conclude, the evidence for pervasive market, size, and book-to-market factors in
Indian stock returns is found. They find that cross-sectional mean returns are explained
by exposures to these three factors, and not by the market factor alone. They find mixed
evidence for parallel market, size and book-to- market factors in earnings they do not
find any reliable link between the common risk factors in earnings and those in stock
returns. The empirical results, as a whole, are reasonably consistent with the Fama-
French three- factor model.
Rolf w Banz:(1981)Relationship between return and market value of common

stocks:
This paper examines the empirical relationship between the return and the market value
of the NYSE common stocks .It is found that smaller firms have had higher risk adjusted
returns on average than large firms and evidence that CAPM is mis specified.
To summarize, Single period CAPM postulates a simple linear relationship between

expected return and the market risk of a security .But results are inconclusive. Evidence
suggests that additional factors are relevant for asset pricing, litzenberger & Ramaswamy
(1979), Basu (1977).results of the study are not based on a particular equilibrium model.
So it is not possible to determine whether market value matters or whatever it is only
proxy for unknown true additional factors correlated with market value.

The data used in this paper, Sample includes all common stocks quoted on the NYSE
between 1926 and 1975, monthly price and return data & no of shares outstanding at the
end of each month. Three different market indices are used CRSP-equally and value
weighted indices, combination of value weighted index & return data on corporate &
government bonds.
The Methodology used is, they have selected 25 portfolios first one to five on the basis of
market value. Then securities in each of those five are in assigned to one of five
portfolios on the basis of their beta. Next five years data are used for the re estimation of
the security beta .stock prices and number of shares outstanding at the end of five year
periods is used for the calculation of the market proportion. The cross-sectional
regression is performed in each month.
To conclude, evidence presented in this paper suggests that the CAPM is mis specified
.Small NYSE firms have had significantly larger risk adjusted returns than large NYSE
firms over a forty year period. The size effect exists but it is not at all clear why it exists
.so it should be interpreted with caution. it might be tempting to use the size effect e g: as
the basis for the theory of mergers larger firms are able to pay a premium for the smaller
stocks since they will be able to discount the same cash flows at a smaller discount rate
.Naturally, this might turn out to be complete nonsense if size were to be shown to be just
a proxy.


Problem statement
CAPM one of the most popular methods used for estimating the required returns,
which states that only beta, the systematic risk has the power to explain the returns. But
recent empirical studies have suggested apart from beta others factors like skew ness,
variance, co skew ness etc also have a significant power to explain the returns and not
alone the beta as suggested by traditional CAPM. In light of this, here in this project we
address the question whether the CAPM offers a better explanation of stock returns in the
Indian capital markets, or can we find the existence of any other factors apart from
systematic risk which offers better explanation of the stock returns in Indian stock
market.
Objectives
1. To test whether the CAPM is appropriate in Indian capital markets

conditions.
2. To find the evidence of other risk factors namely variance and skew ness
in addition to beta (systematic risk) that is present in the Indian capital
markets.
3. To find whether the additional risk factors namely variance and skew ness
present in Indian capital market, offer a better explanation of the stock
returns when compared to beta.
A brief explanation of the above objectives:
1) To test whether the CAPM is appropriate in Indian capital markets conditions

The question is whether the CAPM is appropriate given the potential relevance of
unsystematic risk of the market distortions, thin trading and its related effects on the
market prices. Also to find out whether the CAPM offers a better explanation of stock
returns in the Indian capital market.
2) To find the evidence of other risk factors namely variance and skew ness in addition to
beta (systematic risk) those are present in the Indian capital markets.

Since several researchers have found that the beta is not only the factor which
explains the company returns, but there are also other factors to be considered, so in this
project there is an attempt to find out the additional factors namely variance and skew
ness which are not considered by the capital asset pricing model, that are found in the
Indian capital markets and have considerable influence on the stock returns.
3) To find whether the additional risk factors namely variance and skew ness present in
Indian capital market, offer a better explanation of the stock returns when compared to
beta.
After finding the evidence of the additional factors namely variance and skew
ness that are present in the Indian capital markets, the next objective would be to identify
whether these factors explains the stock returns better than the beta as predicted by the
capital asset pricing model. So that the importance of considering the additional factors is
highlighted.
Scope of the study.

Since many empirical studies have shown that there are also other factors which
explain the company returns, apart from beta, which according to CAPM is the only
factor which explains the company returns ,the study will help the Indian investors to
consider other factors while determining the returns of the company and arrive at proper
decisions.
Limitations of the study
1) The study is restricted to BSE 100 companies.

The sample companies consisted of the stocks in the BSE100 index, out of which,
only 87 companies are considered for the research
2) The research is not done by taking into consideration a bigger index.
The research should have been done taking into consideration a much bigger
index, so that the company sample would be more and the conclusions would have been
more accurate. But it is limited to BSE 100

3) Only 4years data have been taken for the purpose of the study.
Only 4 years data is considered for the purpose of the analysis. However since the
daily data is considered the 4 years data is considered to be relevant and the conclusions
arrived at are accurate.
4) Consideration of limited additional factors.
Only measures like variance, skewness is considered, apart from beta. However
there also other measures like co-skew ness, kurtosis which are not considered in this
study. This can be considered for further research.
Data
Secondary data
Daily adjusted closing price, of the companies included in the BSE 100 and also
for the BSE 100 index is collected for 4 years, which is essential for the purpose of
calculation and analysis.
Sources of Data.
The required data was taken from the prowess 2.5 database and capital line plus
,center for monitoring Indian economy private limited (CMIE).
Period of the study

The study is conducted for a period of 4 years starting from 2002 to 2005.
Four years is taken, so that the results presented are more accurate, and we can rely
upon the results that are calculated for the purpose of analysis.
Sample
The sample consists of companies included in the BSE 100. The sampling
technique used here is convenience sampling, which is by selecting the companies in
the BSE 100.

Sample size
The size of the sample is 87 companies, included in the BSE 100. The
other thirteen companies is not included in the study, because in early years of the
study they were not listed in the BSE 100 and hence the data for the company in that
years as a listed company in the BSE 100 is not available, if these companies are
selected there would be lot of deviations, which would affect the out come of the
results and there by affecting our analysis to an larger extent. Also at the end, our
conclusions would not be accurate.
The companies included in the sample are as follows:
A B B Ltd. G A I L (India) Ltd.
Aditya Birla Nuvo Ltd. Glaxosmithkline Pharmaceuticals Ltd.
Andhra Bank Glenmark Pharmaceuticals Ltd.
Arvind Mills Ltd. Grasim Industries Ltd.
Ashok Leyland Ltd. Great Eastern Shipping Co. Ltd.
Asian Paints Ltd. Gujarat Ambuja Cements Ltd.
Associated Cement Cos. Ltd. H C L Technologies Ltd.
Bajaj Auto Ltd. H D F C Bank Ltd.
Bank Of Baroda Hero Honda Motors Ltd.
Bank Of India Hindalco Industries Ltd.
Bharat Electronics Ltd. Hindustan Lever Ltd.
Bharat Forge Ltd. Hindustan Petroleum Corpn. Ltd.
Bharat Heavy Electricals Ltd. Housing Development Finance Corpn. Ltd.
Bharat Petroleum Corpn. Ltd. I C I C I Bank Ltd.
Century Textiles & Inds. Ltd. I T C Ltd.

Chennai Petroleum Corpn. Ltd. I-Flex Solutions Ltd.
Cipla Ltd. Indian Hotels Co. Ltd.
Colgate-Palmolive (India) Ltd. Indian Oil Corpn. Ltd.
Cummins India Ltd. Indian Overseas Bank
Dr. Reddy'S Laboratories Ltd. Indian Petrochemicals Corpn. Ltd.
Industrial Development Bank Of India Ltd. Pfizer Ltd.
Infosys Technologies Ltd. Ranbaxy Laboratories Ltd.
J S W Steel Ltd. Raymond Ltd.
Jindal Steel & Power Ltd. Reliance Capital Ltd.
Kochi Refineries Ltd. Reliance Energy Ltd.
Kotak Mahindra Bank Ltd. Reliance Industries Ltd.
Larsen & Toubro Ltd. Satyam Computer Services Ltd.
Lupin Ltd. Sesa Goa Ltd.
Mahanagar Telephone Nigam Ltd. Shipping Corpn. Of India Ltd.
Mahindra & Mahindra Ltd. Siemens Ltd.
Mangalore Refinery & Petrochemicals Ltd. State Bank Of India
Matrix Laboratories Ltd. Steel Authority Of India Ltd.
Moser Baer India Ltd. Sterlite Industries (India) Ltd.
Motor Industries Co. Ltd. Sun Pharmaceutical Inds. Ltd.
National Aluminium Co. Ltd. Tata Chemicals Ltd.
Nestle India Ltd. Tata Motors Ltd.
Neyveli Lignite Corpn. Ltd. Tata Power Co. Ltd.
Nicholas Piramal India Ltd. Tata Steel Ltd.
Oil & Natural Gas Corpn. Ltd. Tata Tea Ltd.
Oriental Bank Of Commerce Tata Teleservices (Maharashtra) Ltd.
U T I Bank Ltd. Wipro Ltd.
United Phosphorus Ltd. Wockhardt Ltd.
Videsh Sanchar Nigam Ltd. Zee Telefilms Ltd.
Vijaya Bank

Companies not included in the sample size:
Allahabad Bank
Bharti Airtel Ltd.
Biocon Ltd.
Canara Bank
Jaiprakash Associates Ltd.
Maruti Udyog Ltd.
N T P C Ltd.
Patni Computer Systems Ltd.
Petronet L N G Ltd.
Punjab National Bank
Tata Consultancy Services Ltd.
Ultratech Cement Ltd.
Union Bank Of India

Statistical procedure.
To test whether measures of variance, skew ness might offer an improved
explanation of company returns, individual estimates were prepared for the BSE 100
companies.
Estimates were prepared on an annual basis, for financial years 2002, 2003, 2004,
and 2005 using individual daily market returns for each company.
For each of the sample companies, annual estimates of beta, variance and skewness are
initially estimated. Second pass regressions then offer an indication of whether any of
these estimates offer a significant explanation of company returns. To do this, measures
of average annual daily returns for each company are regressed on the different measures
of risk.
The following two regressions are run;

1. Simple single factor regression tests.
It offers an indication of whether individual measures are significant in explaining

the company returns. Here the average annual returns are considered as dependent
variable and the beta, variance and skewness individually as independent variable and
regression is run.
2. Multiple regression tests.
It offers an indication of whether a combination of measures will provide a fuller

explanation of the company returns. Here two independent variables are considered like
beta and variance, beta and skewness and so on.
Three alternative formulations of multiple regression tests are:
Model 1:
A test of the cross sectional explanatory power of market model betas in
competition with the variance of returns:
Ri=α+βi (b1) +Variance (b2) +ei

Model 2:
competition with skew ness of returns:
Ri=α+βi (b1) +Skew ness (b3) +ei
Model 3:
competition with both the variance of returns and the skew ness of returns:
Ri=α+βi (b1) +Variance (b2) +Skew ness (b3) +ei
Back ground of Regression.
Regression shows us how to determine both the nature and the strength of a
relationship between two variables. We will learn to predict, with some accuracy, the
value of an unknown variable based on past variable based on past observations of that
variable and others.
Origin of terms regression and multiple regression.

The term regression was first used as a statistical concept in 1877 by Francis
Galton. Galton made a study that showed that the height of children born to tall parents
tends to move back or regress towards the mean height of the population. He designated
the word regression as the name of the general process of predicting one variable from
another. Later, statisticians coined the term multiple regression to describe the process by
which several variables are used to predict another.
In regression analysis, we develop an estimating equation that is the mathematical
formula that relates the known variables to the unknown variables; here we learn the
pattern of relationship between variables. Regression analysis is based on the relationship
or association between two or more variables. The known variables are called the
independent variables. The variables we are trying to predict are called dependent
variables.

In regression, we can have only one dependent variable in our estimating

equation. However we can use more than one independent variable. Often when we add
independent variables, we can improve the accuracy of our prediction. We can find two
relationships between the variables that is direct relationship, as the independent variable
increases, the dependent variable also increases. The slope of such line is called the
positive slope and inverse relationship, as the independent variable decreases dependent
variable also decreases. The slope of such line is called the negative slope.
Here in regression we have to consider the relationships found by regression to be
relationships of associations but not necessarily of cause and effect. Unless we have
specific reasons for believing that the values of the dependent variable are caused by the
values of the independent variables, we should not infer causality from the relationships
we find by regression.
Multiple regressions
When we use more than one independent variable to estimate the dependent
variable, it is called as multiple regressions. Here we can increase the accuracy of the
estimate.
The principal advantage of multiple regressions is that it allows us to use more of
the information available to us to estimate the dependent variable. In addition, in multiple
regressions, we can look at each individual independent variable and test whether it
contributes significantly to the way the regression describes the data. In this project this is
What we are going do using regression that is testing whether the independent variables
like beta, variance, skew ness individually contribute significantly to the returns and also
in combination whether these independent variables contribute significantly to the
returns.
Multiple regressions will also enable us to fit curves as well as lines. Using the
technique of dummy variables, we can even include qualitative factors such as gender in
our multiple regressions. This technique will enable us to analyze the discrimination
problem.

Dummy variables and fitting curves are only two of the many modeling technique
that can be used in the multiple regression to increase the accuracy of our estimating
equations.
Hypothesis testing
Null hypothesis (H0): There is no significant relationship between the risk factors
namely beta, variance, skewness and returns.
Alternative hypothesis (H1): There is significant relationship between the risk factors
namely beta, variance, skewness and returns.
T test is used to test the hypothesis.
For the purpose of running the single factor and multiple regressions and also for testing
hypothesis the SPSS (statistical package for social science) software is used.
We use scatter diagram to find the relationship between return and beta, return and
skewness, return and variance .a brief background of scatter diagram is given below.

SCATTER DIAGRAMS
The first step in determining whether there is relationship between two variables
is to examine the graph of the observed (known) data. This graph or chart is known as
scatter diagram.
A scatter diagram can give us two types of information. Visually, we can look for
patterns that indicate that the variables are related. Then if variables are related we can
see what kind of line, or estimation equation, describes this relationship.
In scatter diagrams the pattern of points results because each pair of data will be
recorded as a single point. When all these points are visualized together, we can visualize
the relationship that exists between the two variables.
The following relationships are possible in a scatter diagram
1. Direct linear relationships.
Here the value of Y increases as X increases.
Ex:
80
70
60
50
40
30
20
10
0
0 20 40 60 80
2. Inverse linear relationships.
Here the value of Y decreases as X decreases.
Ex:
70
60
50
40
30
20
10
0
0 20 40 60 80

The relationship between two variables can take the form of a curve.
3. Direct curvilinear relationships.
Here the value of Y increases as X increases
Ex:
250
200
150
100
50
0
0 20 40 60 80 100
4. Inverse curvilinear relationships.
Here the value of Y decreases as X decreases
Ex:
250
200
150
100
50
0
0 20 40 60 80

5. Inverse linear relationship with a widely scattered pattern of points. The wider
scattering indicates that there is a lower degree of association between the independent
and dependent variables.
Ex:
100
90
80
70
60
50
40
30
20
10
0
0 5 10 15 20 25 30
6. No linear relationship between two variables.
Ex:
90
80
70
60
50
40
30
20
10
0
0 10 20 30 40
Based on the scatter diagrams interpretation we find the relationships between the
return and beta, return and variance, return and skew ness in the project and draw
necessary conclusions.


Table 1 showing return, beta, variance and skew ness for the year 2002.
2002 RETURN BETA VARIANCE SKEWNESS

A B B Ltd. 0.19793 0.43320 0.11437 -0.00111
Aditya Birla Nuvo Ltd. 0.25817 0.53506 0.17121 0.00481
Andhra Bank 0.94309 1.04413 0.21841 0.00534
Arvind Mills Ltd. 0.89154 1.53131 0.36482 0.02000
Ashok Leyland Ltd. 0.35294 0.85887 0.23161 0.00616
Asian Paints Ltd. 0.17877 0.27961 0.05568 0.00016
Associated Cement Cos. Ltd. 0.08399 0.96599 0.09876 0.00078
Bajaj Auto Ltd. 0.28179 0.70551 0.10107 0.00081
Bank Of Baroda 0.61456 1.13519 0.15860 0.00185
Bank Of India 0.88499 1.08309 0.17022 0.00196
Bharat Electronics Ltd. 0.74636 1.88460 0.40970 0.01293
Bharat Forge Ltd. 0.86925 1.25259 0.25737 0.00439
Bharat Heavy Electricals Ltd. 0.20506 1.06709 0.13443 0.00023
Bharat Petroleum Corpn. Ltd. 0.13700 1.39587 0.27918 -0.00815
Century Textiles & Inds. Ltd. 0.27162 1.72721 0.31729 0.01557
Chennai Petroleum Corpn. Ltd. 0.29135 1.14678 0.21647 0.01138
Cipla Ltd. -0.23555 0.20112 0.04610 -0.00081
Colgate-Palmolive (India) Ltd. -0.21263 0.19006 0.04506 0.00001
Cummins India Ltd. -0.08012 0.59633 0.11213 0.00084
Dr. Reddy'S Laboratories Ltd. -0.02778 0.77842 0.10145 -0.00313
G A I L (India) Ltd. 0.10821 0.76377 0.10059 0.00108
Glaxosmithkline Pharmaceuticals Ltd. 0.06140 0.35467 0.09234 0.00109
Glenmark Pharmaceuticals Ltd. 0.23332 0.47375 0.14525 0.00317
Grasim Industries Ltd. 0.13805 0.57957 0.05630 0.00028
Great Eastern Shipping Co. Ltd. 0.31616 0.78747 0.12282 -0.00067
Gujarat Ambuja Cements Ltd. -0.15100 0.80540 0.08225 0.00115
H C L Technologies Ltd. -0.38526 1.75626 0.30928 -0.00791
H D F C Bank Ltd. -0.02569 0.31753 0.05811 0.00047
Hero Honda Motors Ltd. 0.07934 1.10184 0.17703 0.00088
Hindalco Industries Ltd. -0.08710 0.39205 0.06030 -0.00039
Hindustan Lever Ltd. -0.20745 0.83878 0.07182 0.00014
Hindustan Petroleum Corpn. Ltd. 0.72401 1.52649 0.34599 -0.01636
Housing Development Finance Corpn. Ltd. 0.07740 0.15433 0.05999 0.00000
I C I C I Bank Ltd. 0.46823 0.78730 0.18350 0.00480
I T C Ltd. -0.02445 0.54589 0.07264 -0.00001
I-Flex Solutions Ltd. 0.56336 0.42512 0.06592 0.00021
Indian Hotels Co. Ltd. 0.19886 0.59984 0.09058 0.00018
Indian Oil Corpn. Ltd. 0.60333 1.06888 0.19798 0.01167
Indian Overseas Bank 0.72361 0.72286 0.15382 -0.00088
Indian Petrochemicals Corpn. Ltd. 0.40705 0.85083 0.31532 -0.05355
Industrial Development Bank Of India Ltd. 0.31491 0.99961 0.24684 0.00724
Infosys Technologies Ltd. 0.15806 1.44348 0.15403 -0.00106
J S W Steel Ltd. 0.93031 1.69710 0.54058 0.01444
Jindal Steel & Power Ltd. 0.80466 1.29590 0.22191 0.00617


Kochi Refineries Ltd. 0.51154 1.27096 0.30601 0.01909
Kotak Mahindra Bank Ltd. 1.22813 1.40661 0.49172 0.03073
Larsen & Toubro Ltd. 0.10951 0.76142 0.06075 -0.00010
Lupin Ltd. 0.42996 1.23017 0.23784 0.00787
Mahanagar Telephone Nigam Ltd. -0.28913 1.16727 0.19518 0.00153
Mahindra & Mahindra Ltd. 0.23318 1.31713 0.16839 0.00072
Mangalore Refinery & Petrochemicals Ltd. 0.03611 1.22052 0.48264 0.02313
Matrix Laboratories Ltd. 1.68520 0.07639 0.47048 0.01051
Moser Baer India Ltd. -0.58266 0.87107 0.21425 -0.00897
Motor Industries Co. Ltd. 0.56347 0.25264 0.07876 0.00060
National Aluminium Co. Ltd. 0.62632 1.74012 0.41006 0.01521
Nestle India Ltd. 0.01395 0.23889 0.03786 0.00030
Neyveli Lignite Corpn. Ltd. 0.81903 2.40589 0.60749 0.02370
Nicholas Piramal India Ltd. 0.08416 0.68088 0.08027 -0.00019
Oil & Natural Gas Corpn. Ltd. 0.95654 0.92798 0.24390 0.01293
Oriental Bank Of Commerce 0.40346 0.66824 0.07685 -0.00057
Pfizer Ltd. -0.15453 0.44627 0.04968 0.00142
Ranbaxy Laboratories Ltd. 0.31846 0.62777 0.08845 0.00145
Raymond Ltd. 0.06428 0.43010 0.08036 0.00044
Reliance Capital Ltd. 0.07976 1.29885 0.14228 0.00284
Reliance Energy Ltd. 0.11377 0.41141 0.07340 0.00051
Reliance Industries Ltd. -0.02472 1.00028 0.09799 0.00252
Satyam Computer Services Ltd. 0.16216 2.12208 0.24852 0.00219
Sesa Goa Ltd. 0.31493 0.97901 0.30088 0.01183
Shipping Corpn. Of India Ltd. 0.80760 1.75218 0.38044 0.00560
Siemens Ltd. 0.50190 0.88537 0.14063 0.00076
State Bank Of India 0.43719 0.87216 0.09544 0.00107
Steel Authority Of India Ltd. 0.74830 1.66982 0.36365 0.02150
Sterlite Industries (India) Ltd. 0.01889 0.04288 0.02683 0.00012
Sun Pharmaceutical Inds. Ltd. 0.04850 0.20038 0.05197 -0.00004
Tata Chemicals Ltd. 0.38420 0.97490 0.15869 0.00323
Tata Motors Ltd. 0.48041 1.20408 0.17384 0.00168
Tata Power Co. Ltd. -0.06792 1.08603 0.08377 -0.00056
Tata Steel Ltd. 0.55244 1.13058 0.12657 0.00068
Tata Tea Ltd. 0.03004 0.85333 0.09405 0.00213
Tata Teleservices (Maharashtra) Ltd. -0.23428 0.40687 0.15680 0.01041
U T I Bank Ltd. 0.52884 1.04190 0.17668 0.00224
United Phosphorus Ltd. 1.23431 1.33303 0.68649 0.02597
Videsh Sanchar Nigam Ltd. -0.73903 0.59410 0.32061 -0.08455
Vijaya Bank 0.68962 0.72884 0.19705 0.01053
Wipro Ltd. 0.01744 1.55578 0.21510 0.00224
Wockhardt Ltd. -0.08095 0.24939 0.04228 0.00031
Zee Telefilms Ltd. -0.13552 1.77132 0.28333 0.00383


A B B Ltd. 0.99681 0.42642 0.12532 0.00208
Andhra Bank 0.95032 1.08433 0.28733 0.00358
Arvind Mills Ltd. 1.10089 1.13725 0.25367 0.00728
Asian Paints Ltd. 0.44029 0.25811 0.05688 0.00107
Associated Cement Cos. Ltd. 0.39695 1.14099 0.13456 0.00062
Bajaj Auto Ltd. 0.81726 0.41746 0.07961 0.00072
Bank Of Baroda 1.11826 1.21131 0.35114 0.00410
Bank Of India 0.58160 1.17937 0.21465 0.00041
Bharat Forge Ltd. 1.35325 0.69741 0.14927 0.00216
Bharat Petroleum Corpn. Ltd. 0.73106 0.90037 0.13325 0.00083
Cipla Ltd. 0.38160 0.47566 0.10556 0.00027
Colgate-Palmolive (India) Ltd. 0.16882 0.27244 0.05315 0.00128
Cummins India Ltd. 0.96944 0.60378 0.15668 0.00293
Dr. Reddy'S Laboratories Ltd. 0.46373 0.50132 0.12377 0.00131
G A I L (India) Ltd. 1.31068 1.15422 0.14796 0.00216
Great Eastern Shipping Co. Ltd. 1.54851 1.01456 0.22610 0.00527
Gujarat Ambuja Cements Ltd. 0.62056 0.78847 0.09536 -0.00007
H C L Technologies Ltd. 0.49592 1.51513 0.30789 -0.01214
H D F C Bank Ltd. 0.51534 0.49287 0.08520 0.00088
Hindalco Industries Ltd. 0.87612 0.59818 0.08230 0.00025
Hindustan Lever Ltd. 0.11891 0.79144 0.08388 0.00011
Hindustan Petroleum Corpn. Ltd. 0.41829 0.82779 0.13918 -0.00161
I C I C I Bank Ltd. 0.74378 0.73126 0.13501 0.00258
I T C Ltd. 0.39931 0.56187 0.05805 0.00011
Indian Overseas Bank 0.81130 0.69412 0.18947 0.00085
Indian Petrochemicals Corpn. Ltd. 1.05106 1.14184 0.16084 0.00150
Industrial Development Bank Of India Ltd. 1.07947 0.95685 0.37104 0.01618
J S W Steel Ltd. 0.88000 1.45122 0.51416 0.01194


Kochi Refineries Ltd. 1.34532 0.89423 0.31670 0.01226
Larsen & Toubro Ltd. 0.90399 0.84825 0.09988 0.00082
Lupin Ltd. 1.56980 1.22823 0.33680 0.00350
Mahanagar Telephone Nigam Ltd. 0.37278 0.67570 0.18111 0.00425
Mangalore Refinery & Petrochemicals Ltd. 1.97978 1.21008 0.42117 0.02673
Matrix Laboratories Ltd. 2.09761 0.72072 0.17159 -0.00090
Moser Baer India Ltd. 1.49219 0.61016 0.29511 -0.00638
National Aluminium Co. Ltd. 0.74829 1.14966 0.18047 0.00112
Nestle India Ltd. 0.27591 0.04129 0.04100 0.00035
Neyveli Lignite Corpn. Ltd. 1.03115 1.09994 0.25110 0.00407
Nicholas Piramal India Ltd. 1.20538 0.74458 0.17358 0.00486
Oil & Natural Gas Corpn. Ltd. 0.82662 1.17326 0.12185 -0.00008
Oriental Bank Of Commerce 1.64073 1.29374 0.35378 0.00334
Pfizer Ltd. 0.34077 0.35523 0.12131 0.00296
Ranbaxy Laboratories Ltd. 0.61580 0.59209 0.06826 -0.00003
Raymond Ltd. 0.81376 0.64331 0.15519 0.00354
Reliance Industries Ltd. 0.65480 1.02005 0.08415 -0.00003
Satyam Computer Services Ltd. 0.27905 1.76588 0.28573 -0.00242
Sesa Goa Ltd. 2.15369 1.21987 0.42205 0.01180
Shipping Corpn. Of India Ltd. 0.98443 1.39992 0.35671 0.00784
Siemens Ltd. 1.24047 0.56709 0.11731 0.00202
State Bank Of India 0.64458 0.95004 0.08732 -0.00017
Steel Authority Of India Ltd. 1.60651 1.77821 0.48743 0.02191
Sterlite Industries (India) Ltd. 2.24900 0.81212 0.34436 0.02082
Sun Pharmaceutical Inds. Ltd. 0.68272 0.63405 0.14261 0.00055
Tata Motors Ltd. 1.03077 1.13564 0.11387 0.00038
Tata Power Co. Ltd. 1.03326 1.10910 0.11061 -0.00007
Tata Steel Ltd. 1.07534 1.23763 0.12775 0.00034
Tata Tea Ltd. 0.67853 0.78654 0.10453 -0.00028
Tata Teleservices (Maharashtra) Ltd. 1.29418 1.08729 0.37820 0.01730
U T I Bank Ltd. 1.10418 0.80987 0.30032 0.02102
Videsh Sanchar Nigam Ltd. 0.40377 0.65194 0.16287 0.00262
Vijaya Bank 1.08676 0.88655 0.29907 0.00551
Wipro Ltd. 0.06351 1.64074 0.23497 -0.00707
Wockhardt Ltd. 0.47824 0.48647 0.13579 -0.00103
Zee Telefilms Ltd. 0.43112 1.01861 0.24644 0.00255

2004 RETURNS BETA VARIANCE SKEWNESS

A B B Ltd. 0.36454 0.54424 0.09708 -0.00240
Aditya Birla Nuvo Ltd. 0.36323 0.94027 0.19619 -0.00337
Andhra Bank 0.50729 1.58318 0.33849 -0.00962
Arvind Mills Ltd. 0.69542 1.30318 0.30072 -0.00493
Ashok Leyland Ltd. -0.18539 0.92429 0.19723 -0.00310
Asian Paints Ltd. -0.04877 0.42765 0.05171 0.00035
Associated Cement Cos. Ltd. 0.32161 0.96706 0.12107 -0.00090
Bajaj Auto Ltd. -0.00520 0.60641 0.09011 -0.00142
Bank Of Baroda 0.02679 1.81104 0.40715 -0.01257
Bank Of India 0.35213 1.63588 0.36360 -0.00518
Bharat Electronics Ltd. 0.07663 0.82577 0.14924 -0.00060
Bharat Forge Ltd. 0.30987 0.67883 0.11605 -0.00065
Bharat Heavy Electricals Ltd. 0.41588 1.31412 0.23905 -0.01061
Bharat Petroleum Corpn. Ltd. 0.01892 0.98547 0.21463 -0.00227
Century Textiles & Inds. Ltd. 0.22706 1.20627 0.27361 -0.00275
Chennai Petroleum Corpn. Ltd. 0.92955 1.53102 0.48744 -0.00799
Cipla Ltd. 0.18583 0.72287 0.11702 -0.00186
Cummins India Ltd. -0.04474 0.56142 0.13919 0.00057
Dr. Reddy'S Laboratories Ltd. -0.50099 0.47389 0.14089 -0.00799
G A I L (India) Ltd. -0.12091 1.81447 0.36452 -0.00115
Glaxosmithkline Pharmaceuticals Ltd. 0.29109 0.47140 0.08108 -0.00130
Grasim Industries Ltd. 0.27547 0.85670 0.13619 -0.00080
Gujarat Ambuja Cements Ltd. 0.27888 0.99121 0.13325 -0.00249
H C L Technologies Ltd. 0.11357 0.77797 0.16307 0.00111
H D F C Bank Ltd. 0.34721 0.88817 0.16164 -0.00236
Hero Honda Motors Ltd. 0.24088 0.90643 0.15497 -0.00036
Hindalco Industries Ltd. 0.01305 0.71315 0.13267 -0.00045
Hindustan Lever Ltd. -0.35521 0.64500 0.10685 -0.00397
Hindustan Petroleum Corpn. Ltd. -0.08836 0.96807 0.17425 -0.00362
I C I C I Bank Ltd. 0.22618 0.85708 0.15667 -0.00064
I T C Ltd. 0.28539 0.68335 0.09801 0.00064
I-Flex Solutions Ltd. -0.28357 1.06118 0.18538 -0.00020
Indian Hotels Co. Ltd. 0.18511 0.63240 0.09142 -0.00093
Indian Oil Corpn. Ltd. 0.11599 1.36981 0.24139 -0.00551
Indian Overseas Bank 0.82613 1.58263 0.44407 -0.01105
Indian Petrochemicals Corpn. Ltd. -0.21422 1.74912 0.33762 -0.00765
Industrial Development Bank Of India Ltd. 0.56991 1.64443 0.55262 -0.00287
J S W Steel Ltd. 0.25344 1.17618 0.30537 0.00558
Jindal Steel & Power Ltd. 0.37109 1.07791 0.22494 -0.00081

2004 RETURNS BETA VARIANCE SKEWNESS

Kochi Refineries Ltd. 0.23523 1.09420 0.24291 -0.00511
Kotak Mahindra Bank Ltd. 0.39136 0.70127 0.14532 -0.00364
Larsen & Toubro Ltd. 0.26461 0.73571 0.14560 -0.00075
Lupin Ltd. -0.02093 0.79748 0.16610 -0.00018
Mahanagar Telephone Nigam Ltd. 0.11770 1.02643 0.20550 -0.00206
Mahindra & Mahindra Ltd. 0.33613 0.99881 0.15545 -0.00039
Mangalore Refinery & Petrochemicals Ltd. 0.06172 1.65620 0.35269 -0.00431
Matrix Laboratories Ltd. 0.44669 0.35186 0.10451 0.00196
Moser Baer India Ltd. -0.39228 0.90833 0.23089 -0.00202
Motor Industries Co. Ltd. 0.16719 0.69577 0.12163 -0.00069
National Aluminium Co. Ltd. 0.02647 1.28363 0.22957 -0.00609
Nestle India Ltd. -0.16487 0.22172 0.04987 -0.00013
Neyveli Lignite Corpn. Ltd. 0.11163 1.66963 0.36859 -0.01823
Nicholas Piramal India Ltd. 0.67325 0.60957 0.12658 -0.00106
Oriental Bank Of Commerce 0.26829 1.72223 0.36390 -0.01852
Pfizer Ltd. 0.25167 0.69080 0.11901 -0.00132
Ranbaxy Laboratories Ltd. 0.13059 0.46697 0.06528 -0.00035
Raymond Ltd. 0.32017 0.88980 0.15886 0.00038
Reliance Capital Ltd. 0.00228 1.46647 0.25461 -0.00892
Reliance Energy Ltd. 0.02608 1.38482 0.27383 -0.01827
Reliance Industries Ltd. -0.07086 1.11896 0.12972 -0.00483
Satyam Computer Services Ltd. 0.10960 0.93562 0.15582 0.00026
Sesa Goa Ltd. 0.55403 1.04848 0.37692 0.00042
Shipping Corpn. Of India Ltd. -0.04965 1.57102 0.33996 -0.01597
Siemens Ltd. 0.20816 0.65362 0.11059 -0.00516
Steel Authority Of India Ltd. 0.20298 1.73992 0.37098 -0.01006
Sterlite Industries (India) Ltd. -0.18585 0.84841 0.18881 -0.00036
Tata Chemicals Ltd. 0.07637 1.16474 0.21690 -0.00399
Tata Motors Ltd. 0.11051 1.27835 0.19118 -0.00040
Tata Power Co. Ltd. 0.21848 1.48270 0.25828 -0.01116
Tata Steel Ltd. 0.26395 1.34781 0.20594 -0.00189
Tata Tea Ltd. 0.32204 1.00435 0.16020 -0.00139
Tata Teleservices (Maharashtra) Ltd. 0.36367 1.13212 0.29744 0.00667
U T I Bank Ltd. 0.31505 1.05188 0.32542 -0.00172
United Phosphorus Ltd. 0.33204 0.64445 0.14370 -0.00007
Vijaya Bank 0.55192 1.41138 0.35045 -0.01342
Wipro Ltd. 0.25576 1.17886 0.19296 0.00056
Wockhardt Ltd. 0.38727 0.53259 0.16386 0.00357
Zee Telefilms Ltd. 0.13128 0.73739 0.26005 0.00221


A B B Ltd. 0.68733 0.56230 0.07949 0.00113
Andhra Bank 0.03248 1.41889 0.15994 0.00133
Arvind Mills Ltd. -0.32490 1.42359 0.14341 0.00035
Asian Paints Ltd. 0.58975 0.38312 0.04597 0.00006
Associated Cement Cos. Ltd. 0.45566 0.78671 0.06151 -0.00005
Bajaj Auto Ltd. 0.57005 0.83693 0.07988 0.00008
Bank Of Baroda 0.00249 1.67011 0.16343 -0.00039
Bank Of India 0.30521 1.92050 0.24596 0.00226
Bharat Forge Ltd. 0.60433 1.04559 0.10995 0.00107
Bharat Petroleum Corpn. Ltd. -0.05522 0.78746 0.08925 0.00072
Cipla Ltd. 0.33478 0.92365 0.09178 0.00029
Cummins India Ltd. 0.25909 0.72127 0.10582 0.00038
Dr. Reddy'S Laboratories Ltd. 0.12294 0.80844 0.07950 -0.00008
G A I L (India) Ltd. 0.14163 1.17547 0.09399 0.00063
Gujarat Ambuja Cements Ltd. 0.39659 0.97810 0.08971 0.00025
H C L Technologies Ltd. 0.45135 1.06485 0.11000 0.00037
H D F C Bank Ltd. 0.31005 0.89002 0.08415 0.00073
Hindalco Industries Ltd. 0.06623 1.06545 0.08119 -0.00046
Hindustan Lever Ltd. 0.31814 0.86538 0.08610 0.00050
Hindustan Petroleum Corpn. Ltd. -0.19742 0.81942 0.07023 0.00051
I C I C I Bank Ltd. 0.45557 1.13989 0.10018 0.00004
I T C Ltd. 0.48625 0.76281 0.07928 0.00169
Indian Overseas Bank 0.17448 1.18389 0.16346 0.00146
Indian Petrochemicals Corpn. Ltd. 0.25606 1.16404 0.08939 0.00050
Industrial Development Bank Of India Ltd. -0.12240 1.39002 0.19486 0.00126
J S W Steel Ltd. -0.47233 1.19740 0.17477 0.00034


Kochi Refineries Ltd. -0.21071 0.63388 0.09583 -0.00399
Larsen & Toubro Ltd. 0.63021 0.90305 0.08950 0.00082
Lupin Ltd. 0.11222 0.66753 0.11536 0.00205
Mahanagar Telephone Nigam Ltd. -0.07158 1.04561 0.11109 0.00019
Mangalore Refinery & Petrochemicals Ltd. -0.14438 1.11142 0.10965 0.00165
Matrix Laboratories Ltd. -0.00627 1.15814 0.22333 -0.00013
Moser Baer India Ltd. -0.16894 0.87158 0.14446 0.00282
National Aluminium Co. Ltd. 0.08966 1.20197 0.10180 -0.00105
Nestle India Ltd. 0.47073 0.20209 0.06152 0.00052
Neyveli Lignite Corpn. Ltd. 0.08352 0.95099 0.10252 -0.00023
Nicholas Piramal India Ltd. -0.12518 0.94544 0.14832 0.00044
Oriental Bank Of Commerce -0.21254 1.04959 0.10720 0.00101
Pfizer Ltd. 0.38319 0.32336 0.06844 0.00036
Ranbaxy Laboratories Ltd. -0.54626 0.83206 0.11334 -0.00055
Raymond Ltd. 0.24239 0.68849 0.10548 0.00082
Reliance Industries Ltd. 0.51081 1.04758 0.05993 0.00009
Satyam Computer Services Ltd. 0.58776 1.33560 0.10608 -0.00017
Sesa Goa Ltd. 0.67566 1.26157 0.26786 0.01017
Shipping Corpn. Of India Ltd. -0.05408 0.93192 0.08275 0.00036
Siemens Ltd. 1.00475 0.67999 0.09780 0.00224
Steel Authority Of India Ltd. -0.14778 1.35039 0.14779 -0.00030
Sterlite Industries (India) Ltd. 0.52117 1.33778 0.14437 -0.00002
Tata Motors Ltd. 0.25672 1.21681 0.09928 0.00017
Tata Power Co. Ltd. 0.10951 1.30215 0.11091 0.00068
Tata Steel Ltd. -0.01345 1.17558 0.08243 -0.00051
Tata Tea Ltd. 0.69510 0.80180 0.06041 0.00043
Tata Teleservices (Maharashtra) Ltd. -0.16719 1.24510 0.17521 0.00554
U T I Bank Ltd. 0.43578 0.78224 0.14316 0.00126
Vijaya Bank -0.17999 1.30804 0.15583 0.00205
Wipro Ltd. 0.21444 1.30068 0.09141 0.00007
Wockhardt Ltd. 0.22963 0.72962 0.10680 0.00039
Zee Telefilms Ltd. -0.08664 0.99997 0.16794 0.00016

SCATTER DIAGRAMS
X axis= Return
Y axis=Beta
Return v/s Beta: 2002

2002
2.0000
1.5000
1.0000
Return
0.5000
0.0000
-0.5000
-1.0000
0.0000 0.5000 1.0000 1.5000 2.0000 2.5000 3.0000
Beta

2003
2.5000
2.0000
1.5000
Returns
1.0000
0.5000
0.0000
0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 1.4000 1.6000 1.8000 2.0000
Beta


2004
1.4000
1.2000
1.0000
0.8000
0.6000
Return
0.4000
0.2000
0.0000
-0.2000
-0.4000
-0.6000
0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 1.4000 1.6000 1.8000 2.0000
Beta

2005
1.40000
1.20000
1.00000
0.80000
0.60000
0.40000
Returns
0.20000
0.00000
-0.20000
-0.40000
-0.60000
-0.80000
0.00000 0.50000 1.00000 1.50000 2.00000 2.50000
Beta

Interpretation:
Excepting in the years 2002 and 2003, where we can find a direct linear
relationship with wide scattering, in other two years there is no evidence of linear
relationship between beta and return as propounded by the CAPM model. However one
cannot rule out the CAPM completely in the Indian context, because there is evidence of
beta being the significant explanatory variable.
RETURN V/S VARIANCE

X axis: Return
Y axis: Variance
Return v/s Variance 2002
2002
2.0000
1.5000
1.0000
Return
0.5000
0.0000
-0.5000
-1.0000
0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000 0.7000 0.8000
Variance

2003
2.5000
2.0000
1.5000
Returns
1.0000
0.5000
0.0000
0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000
Variance

2004
1.4000
1.2000
1.0000
0.8000
0.6000
Returns
0.4000
0.2000
0.0000
-0.2000
-0.4000
-0.6000
0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000
Variance

2005
1.40000
1.20000
1.00000
0.80000
0.60000
0.40000
Returns
0.20000
0.00000
-0.20000
-0.40000
-0.60000
-0.80000
0.00000 0.05000 0.10000 0.15000 0.20000 0.25000 0.30000 0.35000
Variance
Interpretation:
In the above scatter diagrams we can find that, the variance and the return as a
direct linear relationship with wide scattering in three years that is 2002, 2003 & 2004
indicating that the variance is better proxy than the beta. The variance can be considered
as a better explanatory variable of the returns than the beta when both are considered
individually. However the variance and the return relationship in the year 2005 cannot be
found as indicated by the scatter diagram, where we can find that the points are widely
scattered indicating no relationship what so ever between return and variance in the year
2005. It can also be noted that the variance is considered to be the alternative proxy,
which came to be true in this analysis.

Return v/s skew ness

X axis: Return
Y axis: skewness
Return v/s skew ness 2002

2002
2.0000
1.5000
1.0000
Returns
0.5000
0.0000
-0.5000
-1.0000
-0.1000 -0.0800 -0.0600 -0.0400 -0.0200 0.0000 0.0200 0.0400
Skewness
2003
2.5000
2.0000
1.5000
Returns
1.0000
0.5000
0.0000
-0.0400 -0.0300 -0.0200 -0.0100 0.0000 0.0100 0.0200 0.0300
Skewness


2004
1.4000
1.2000
1.0000
0.8000
0.6000
Returns
0.4000
0.2000
0.0000
-0.2000
-0.4000
-0.6000
-0.0200 -0.0150 -0.0100 -0.0050 0.0000 0.0050 0.0100
Skewness
2005
1.40000
1.20000
1.00000
0.80000
0.60000
0.40000
Returns
0.20000
0.00000
-0.20000
-0.40000
-0.60000
-0.80000
-0.00002000 -0.00001000 0.00000000 0.00001000 0.00002000 0.00003000 0.00004000 0.00005000
Skewness

Interpretation:
In the above scatter diagrams we can find that, the skew ness and the return has a
direct linear relationship with scattering in three years that is 2002, 2003 & 2005
indicating that the skew ness is better proxy than the beta. The skew ness can be
considered as a better explanatory variable of the returns than the beta when both are
considered individually. However the skew ness and the return relationship in the year
2004 cannot be found as indicated by the scatter diagram, where we can find that the
points are widely scattered indicating no relationship what so ever between return and
skew ness in the year 2004.
Conclusion:
When the scatter diagram is used to find the linear relationship between the beta
and return as indicated by the CAPM model, we can conclude that the beta cannot be
completely ruled out, since it is being an significant explanatory variable in as many as
two years i.e. 2002 and 2003. But we can also find the evidence of other risk factor’s
presence in the Indian capital markets that is the variance and skew ness. However we
cannot find complete linear relationship between the beta and the return as indicated by
the traditional CAPM model. Also the beta in combination with other risk factors is a
better explanatory variable of the returns, giving an indication of not rejecting the CAPM
model completely.

Single factor regression results:
Dependent variable: Return

Independent variable: Beta
Table 5 showing co efficient of beta
Year Constant T value Beta T value

coefficient
2002 0.053121 0.592316 0.259056 3.053341*
2003 0.648909 4.873816 * 0.299030 2.152819*
2004 0.135658 1.636895 ** 0.070013 0.917355
2005 0.406188 3.641318 * -0.145037 -1.336002
*
and ** statistically significant coefficients, at the 5% and 10% respectively.
When beta is considered, it can be seen that it offers a significant explanation of

the company returns in the years 2002 & 2003 at 5%level of significance, there by
rejecting the null hypothesis and accepting the alternative hypothesis. But in the years
2004 & 2005 it does not explain the returns significantly either at 5% or 10% level of
significance, where the null hypothesis is accepted. However the constant explains the
returns significantly in the years 2003 & 2005 at 5% level of significance and in the year
2004 at 10%level of significance, if beta is assumed to be zero.
When variance is considered as second independent variable,

Independent variable: Variance
Table 6 showing co efficient of variance
Year Constant T value Variance T value

coefficient
2002 -0.023788 -0.376796 1.672537 6.224444*
2003 0.514651 5.719405* 2.065359 5.081366*
2004 0.043934 0.682388 0.774762 2.818348*
2005 0.300456 3.507213* -0.321938 -0.462548
*
& ** statistically significant coefficients, at the 5% and 10% respectively.

When variance is considered it offers a significant explanation of the returns in

the years 2002, 2003 & 2004 at 5% level of significance, there by rejecting the null
hypothesis and accepting the alternative hypothesis. The only exception is in the year
2005 where it does not explain the return significantly either at 5% or 10% levels where
the null hypothesis is accepted. However the constant explains the returns significantly in
the years 2003 & 2005 at 5% level of significance when variance is assumed to be zero.
However in the years 2002 and 2004 it does not offer a significant explanation of the
returns.

Independent variable: Skew ness
Table 7 showing co efficient of skew ness
Year Constant T value Skew ness T value

coefficient
2002 0.259265 6.473280* 14.320617 4.940990*
2003 0.805578 17.889902* 35.087666 6.008564*
2004 0.220013 6.340402* 4.419038 0.744254
2005 0.210835 5.862882* 56.450537 3.236677*
*
When skew ness is considered it offers a significant explanation of the returns in

the years 2002, 2003 and 2005 at 5% level of significance there by rejecting the null
hypothesis and accepting the alternative hypothesis. The only exception is in the year
2004 where it does not offer significant explanation of returns either at 5% or 10% where
the null hypothesis is accepted and alternative hypothesis is rejected. However the
constant explains the returns significantly in all the four years at 5% level of significance,
when the skew ness is assumed to be zero.

Multiple regression results
Model 1:
Independent variables: Beta, Variance
Table 8 showing co efficient of beta and variance.
Year Constant T value Beta T value Variance T value

co efficient coefficient
2002 0.025550 0.325816 -0.107718 -1.059313 1.940456 5.260523*
2003 0.598629 4.981936* -0.169693 -1.053701 2.414156 4.607231*
2004 0.178635 2.317112* -0.394317 -2.915611* 2.037230 4.019109*
2005 0.399778 3.545930* -0.191651 -1.346446 0.460701 0.509472
*
In combination the variance explains the returns significantly better than beta in
the years 2002 and 2003 at 5% level of significance. However in the year 2004 both beta
and variance offer a significant explanation of the returns at 5% level of significance .in
the year 2005 none of the measures explain the returns significantly either at 5% or 10%
level of significance .The constant explains the returns significantly in the years 2003,
2004 and 2005 at 5% level of significance when the beta and variance is assumed zero.
Only exception is in the year 2002, it either offers significant explanation of returns at 5%
or10% level significance.

Model 2:
Independent variable: Beta, skew ness
Table 9 showing co efficient of beta and skew ness
Year Constant T value Beta T value Skew ness T value

co efficient coefficient
*
2002 0.111587 1.345463 0.163014 2.022704 12.644533 4.264370*
2003 0.591528 5.242652* 0.242601 2.061831* 34.129826 5.935795*
2004 0.070142 0.774876 0.172755 1.788721** 12.790120 1.705094**
2005 0.434837 4.177870* -0.237706 -2.286103* 65.936665 3.763235*
*
When beta and skew ness is considered both in combination explain the return
significantly in the years 2002, 2003, and 2005 at 5 % level of significance in the year
2004 both in combination explain the return significantly at 10% level of significance.
The constant explains the returns significantly in the years 2003 and 2005 at 5% level of
significance. The exception being in the years 2002 and 2004 where it does not explain
the returns either at 5% and 10% level of significance, when beta and skew ness is
assumed to be zero.
Model 3:

Independent variable: Beta, Variance, Skew ness
Table 10 showing co efficient of beta, variance and skew ness
Year Constant T value Beta co- T value Variance T value Skew ness T value
efficient Co efficient coefficient
** *
2002 0.0786 1.0795 -0.1565 -1.6698 1.7596 5.1738 10.9219 4.1764*
2003 0.5806 5.2195* 0.0369 0.2335 1.1224 1.9116** 26.7290 3.8973*
2004 0.1279 1.5004 -0.2985 -1.9678* 1.9543 1.3669 9.5706 3.8475*
2005 0.4946 4.8228* 0.0060 0.0445 -2.9895 -2.7527* 107.7892 4.7457*
*

When all the measures are considered, it remains inconclusive whether all the
measures explain the returns , in combination at a particular level of significance however
in the year 2002 and 2005 the variance and skew ness offer an significant explanation of
the returns at 5% level of significance , in the year 2004 the skew ness and beta offer
explanation to returns at 5% level of significance .considering individual measures the
skew ness offers an better explanation of returns in the year 2004 at 5% level of
significance ,the variance explains the returns in the year 2003 at 10% level of
significance ,the beta explains returns in the year 2004 and 2002 at 5% and 10% level of
significance respectively.
The constant explains the returns significantly in the years 2002 and 2005 at 5%
level of significance , the years 2002 and 2004 both being an exception either at 5% and
10% level of significance when all the measures are assumed to be zero.


Conclusion:
BETA
Year T tabulated T calculated Null Hypothesis Alternative Hypothesis Since

2002 1.96 3.053341* Rejected Accepted T CAL > T TAB
2004 1.96 0.917355 Accepted Rejected T CAL < T TAB
2005 1.96 -1.336002 Accepted Rejected T CAL < T TAB
VARIANCE
Year T tabulated T calculated Null Hypothesis Alternative Hypothesis since

2005 1.96 -0.462548 Accepted Rejected T CAL < T TAB
SKEWNESS
Year T tabulated T calculated Null Hypothesis Alternative Hypothesis Since

2002 1.96
4.940990* Rejected Accepted T CAL > T TAB
2003 1.96
2004 1.96 0.744254 Accepted Rejected T CAL < T TAB
2005 1.96
The T tabulated is taken at 5% or 10% (two tail test).
This study provides some evidence that apart from beta, other measures of risk
may also be important in estimating company returns or cost of equity. Variance and
skew ness offer a more significant explanation of returns in the Indian capital markets.

There is evidence to show in the project that beta is not only the risk factor which
explains the company returns, there are evidence of other risk factors such as variance
and skew ness significantly explaining the company returns. It can also be seen that the
variance and skew ness is significantly explaining the returns in most of the years either
in either at 5% or 10% level of significance, when compared to the beta.
In combination it seems that the variance is a better proxy than the beta when
model 1 is considered signifying that the variance is better proxy than the beta. Even
skew ness is considered to be a significant explanatory variable of the returns. In multiple
regression results we can see that the skew ness dominating the other risk factors that is
the beta and variance in all most all the years.
However we cannot completely rule out the CAPM in the Indian context, because
in the results it can also be seen that the beta can also be a significant explanatory
variable of the returns in the years 2002 & 2004. Also in combination it seems that beta is
the dominating variable in model 2, in all the years. There fore we cannot completely rule
out the CAPM model.
It can be concluded that beta is not only the factor which explains the returns
significantly as predicted by the CAPM, but also other risk factors are present in Indian
capital markets which explains the return significantly, indicating consideration of the
other factors.
When we consider scatter diagram we can see that the beta has direct linear
relationship with wide scattering with returns in two years that is 2002 &2003 as
predicted by the CAPM. However there is strong evidence that variance and the skewness
are present in the Indian capital markets. In most of the years the skewness and the
variance have direct linear relationship with returns with wide scattering.

The scatter diagram is giving the indication of CAPM being appropriate in the
Indian capital market in the years 2002 and 2003, indicating that the model cannot be
completely ruled out. Even the regression results are indicating that beta is a significant
explanatory variable of the return either individually or in combination. However the
other risk factors namely the variance and skewness are found to be present in Indian
capital markets. These factors also significantly explain the returns in the Indian capital
markets. Both variance and skewness explain return better than beta in most of the years.
As an extension of the study, sample size may be expanded and co-skewness

may be included as another measure of risk. Industry-wise time-series/cross-sectional
analysis also can be done to identify industry-wise risk factors.

GLOSSARY:
Beta: Is the measure of systematic risk (non diversifiable risk).
Return: Return is a financial term that refers to the benefit derived from an investment.
Risk: Risk is the potential impact (positive or negative) to an asset or some characteristic
of value that may arise from some present process or from some future event
Skew ness: skewness is a measure of the asymmetry of the probability distribution of a

real-valued random variable.
Scatter diagram: The graphical relationship between two variables is called scatter
diagram.
Security market line: The graphic relationship between expected return on asset i and
beta is called the security market line.
Variance: The variance of a random variable is a measure of its statistical dispersion,

indicating how far from the expected value its values typically are. The variance of a real-
valued random variable is its second central moment, and it also happens to be its second
cumulant. The variance of a random variable is the square of its standard deviation.

Bibliography:
Websites:
1. www.bse.com
2. www.google.com
Books and Journals

1. Statistical methods- Levin and Lubin.
2. Investments-Marcus and Boodie.
3. Journal of finance.
4. Journal of portfolio management.
5. Journal of International Money and Finance.
6. Review of Economics and Statistics.
References
1. Bekaert, G, C Erb, C Harvey, and T Vishkanta (1998), “Distributional Characteristics
Of Emerging Market Returns and Asset Allocation” The Journal of Portfolio
Management, Vol. 24, pp. 102-116.
2. Fama, Eugene F and French, Kenneth R (1993) “Common Risk Factors in the Returns
on Stocks and Bonds” Journal of Financial Economics, Vol. 33, pp. 3-56.
3. Garciaa, Rene, Ghyselsb, U Eric (1998) “Structural Change and Asset Pricing in
Emerging Markets” Journal of International Money and Finance, Vol. 17, pp. 455-473.
4. Kraus and Litzenberger (1976) “Skewness Preference and the Valuation of Risk
Assets” Journal of Finance, Vol. 31, pp. 1085-1099.
5. Lakshman Alles and Louis Murray (2003) “Risk Factors in Developing Capital
Markets” proceedings of 10th Annual Conference of Global Finance Association

6. Levy, Haim (1978) “Equilibrium in an Imperfect Market: Constraint on the Number

of Securities in the Portfolio” American Economic Review, Vol. 68, pp. 643-658.
7. Lintner, J (1965) “The Valuation of Risky Assets and the Selection of Risky
Investments in Stock Portfolios and Capital Budgets”, Review of Economics and
Statistics, Vol.47, pp. 13-37.
8. Sharpe, WF, (1964), “Capital Asset Prices: A Theory of Market Equilibrium Under
Conditions of Risk” Journal of Finance, Vol. 19, pp. 425-442.
9. Fama and French, CAPM model

Risk Factors in Indian Capital Market-Thimmarayappa-04117

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Risk Factors In Indian Capital Markets

“Risk factors in Indian capital market”

Submitted in partial fulfillment of the requirements of

M.P.BIRLA INSTITUTE OF MANAGEMENT

1 M.P Birla Institute of Management

fulfillment of requirements for MBA course of Bangalore University at M.P.Birla

2 M.P Birla Institute of Management

B.V.RUDRA MURTHY ,MPBIM, Bangalore.

Place: Bangalore Principal

3 M.P Birla Institute of Management

Place: Bangalore PROF.B.V.RUDRA MURTHY

4 M.P Birla Institute of Management

I am thankful to Dr.N.S.Malavalli, Principal, M.P.Birla institute of

I am extremely thankful to PROF.B.V.RUDRA MURTHY, M.P.Birla institute

I equally thank Dr T.V.N Rao for his guidance and suggestion.

5 M.P Birla Institute of Management

6 M.P Birla Institute of Management

TABLE NO TABLE NAME

5 Showing co efficient of beta

6 Showing co efficient of variance

7 Showing co efficient of skew ness

8 Showing co efficient of beta and variance.

9 Showing co efficient of beta and skew ness

10 Showing co efficient of beta, variance and skewness.

7 M.P Birla Institute of Management

8 M.P Birla Institute of Management

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2. Investors make investment decisions based on expected return and the

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6. All investors have homogenous expectations with regard to investment

7. There are no imperfections or frictions in the market to impede investor buying

8. There is no uncertainty about expected inflation; or, alternatively all security

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According to CAPM equation,

Rf is the risk free rate of return.

β IM systematic risk of market.

E (Rm)-Rf is the risk premium.

Beta as a Measure of Systematic Risk

βA= COV (RA, RM)/ σ2M

σ2M is the variance of the return of the market, and

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σ2p = σ2ep + βp2 σ2m

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CAPM in Indian context

The following are the factors identified:

1) Non-Diversified Portfolio Holding

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CAPM and Indian stocks

1. There is no transaction cost, but there is evidence that at least a minimum

2. Investors have homogenous expectation but empirical evidence have

3. There are no imperfections in market, but the imperfections are exhibited

18 M.P Birla Institute of Management

6. Investors make investment decisions based on expected return and the

There may be other measures of systematic risk also. Besides macroeconomic

Estimated betas are considered to be unstable. Major changes in a company

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4. Consideration of taxes leads to an alternative CAPM model that

The CAPM model does not consider the additional factors: