Risk and Return Analysis

1.1 INTRODUCTION Every investment is characterised by return and risk. The concept of risk is intuitively understood by investors. In general, it refers to the possibility of incurring a loss in a financial transaction. But risk involves much more than that. The word ‘risk’ has a definite financial meaning. The possibility of variation of the actual return from the expected return is termed risk. Corporate securities and government securities constitute important investment avenues for investors. These are traded in the securities market. The securities market is one of the most important sectors in the financial system of our country. And also contributes much for the economic development. So securities market act as a glittering avenue for potential investors. Investment in securities market also involves risk. The elements of risk may be broadly classified into two groups. The first group comprises factors that are external to a company and affect a large number of securities simultaneously. These are mostly uncontrollable in nature. The second group includes those factors which are internal to companies and affect only those particular companies. These are controllable to a great extent. The risk produced by the first group of factors is known as systematic risk, and that produced by second group is known as unsystematic risk. The systematic risk of a security can be measured by relating that security’s variability with the variability in the stock market index. A higher variability would indicate higher systematic risk and vice versa. The systematic risk of a security is measured by a statistical measure called Beta. But dealing with the beta, there is a problem of reliability. That is, to what extent the calculated value of beta is reliable. This study deals with the beta estimation practice followed by Indian stock markets, with special

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