article risk and return

8/11/2019 Article Risk and Return

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RISK AND RETURN ANALYSIS OF AUTOMOBILE AND OIL & GAS

SECTORS A STUDY

INTRODUCTION TO THE STUDY

The risk/return relationship is a fundamental concept in not only financial analysis, but in

every aspect of life. If decisions are to lead to benefit maximization, it is necessary that

individuals/institutions consider the combined influence on expected (future) return or benefit as

well as on risk/cost. The requirement that expected return/benefit be commensurate withrisk/cost is known as the "risk/return trade-off" in finance.

This discusses the trade-off and, using conventional statistical tools, provides a method

for quantifying risk. Two categories of risk borne by the firm's stockholders, business risk and

financial risk, are discussed and demonstrated, as is the concept of leverage. The session also

examines risk reduction via portfolio diversification and what requirements need to be met for

firms to experience the benefits of diversification. The Capital Asset Pricing Model (CAPM) is

used to demonstrate the risk/return trade-off by relating the required return on the firm's

investments to its beta (or market) risk.

The relationship between risk and return is an essential factor inall human decision

making. Each investment a firm undertakes, for example, must offer a return that is at least as

high as the return on a similarly risky investment on financial markets. Otherwise shareholders

would choose to invest in the financial markets rather than in the firm.

The aim of this essay is to give students an overview of the relationship between risk and

return in modern portfolio theory.


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After a conclusion in the first section, there are definitions given about the types of risk

and the composition of the expected return of an asset and its relation to standard deviation. The

second section will give an overview on modern portfolio theory and in particular on how the

Capital.

Types of risk

There are two different types of risk. We need to distinguish between:

Market risk and

Unique risk.

Market (Systematic) riskaffects a large number of assets in the economy and is generally

market wide. Uncertainties about the general economy, such as GDP, interest rates, inflation, etc.

Affect systematic risk. Market risk cannot be eliminated by holding a well-diversified

portfolio; its non diversifiable. Firms that produce for example long-living goods such as

aircraft are highly sensitive and thus have high market risk. Conversely, firms that produce goods

for daily needs have a lower market risk.

INTEREST RATE RISK

Interest rate risk is the risk that an investment's value will change as a result of a change

in interest rates. This risk affects the value of bonds more directly than stocks. the root cause of

interest rate risk lies in the fact that ,if the RBI increase or decrease the interest rate (repo rate )

the interest on government securities rise or fall ,the rate of return demanded on alternative

investment vehicle ,such as stocks and bonds issued in the private sector ,rise or fall .in other

words as the cost of money changes for nearly risk free securities, the cost of money to more riskprone issues will also change.


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INFLATION RISK (PURCHASING POWER RISK)

The loss of purchasing power due to the effects of inflation. When inflation is present, the

currency loses its value due to the rising price level in the economy. The higher the inflation rate,

the faster the money loses its value.

LIQUIDITY RISK

The uncertainty associated with the ability to sell an asset on short notice without loss of

value. A highly liquid asset can be sold for fair value on short notice. This is because there are

many interested buyers and sellers in the market.

An illiquid asset is hard to sell because there there few interested buyers. This type of risk

is important in some project investment decisions but is discussed extensively in Investment

courses.

FOREIGN EXCHANGE RISKS

Uncertainty that is associated with potential changes in the foreign exchange value of a

currency. There are two major types: translation risk and transaction risks.

TRANSLATION RISKS

Uncertainty associated with the translation of foreign currency denominated accounting

statements into the home currency. This risk is extensively discussed in Multinational Financial

Management courses.

TRANSACTIONS RISKS

Uncertainty associated with the home currency values of transactions that may beaffected by changes in foreign currency values. This risk is extensively discussed in the

Multinational Financial Management courses.


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Unique Risk (unsystematic risk)

Affects only a single firm or a small number of firms. Uncertainties about a firms labor

contracts or suppliers are part of unsystematic risk. Unique risk describes a firms specific risk

related to the market, which is assumed to be diversified away. It has already been mentioned

that you can eliminate unique risk by holding a well-diversified portfolio. Hence, diversification

is a means of reducing risk. If we hold a large enough portfolio, unsystematic risk of individual

companies cancel each other out, leaving just the systematic risk associated with each company.

This will be the risk in that portfolio.

Statistics gives us the opportunity to measure risk and how to translate risk into a risk

premium.

BUSINESS RISK

The uncertainty associated with a business firm's operating environment and reflected in

the variability of earnings before interest and taxes (EBIT). Since this earnings measure has not

had financing expenses removed, it reflects the risk associated with business operations rather

than methods of debt financing. This risk is often discussed in General Business Management

courses.

Business risk can be divided into two board categories: external and internal .internal

business risk is largely associated with the efficiency with which a firm conduct its operation

within the border operating environment imposed upon it .each firm has it s on internal risk, and

the degree to which it is successful in coping with them is reflected in operating efficiency.

FINANCIAL RISK

The uncertainty brought about by the choice of a firms financing methods and reflected

in the variability of earnings before taxes (EBT), a measure of earnings that has been adjusted for

and is influenced by the cost of debt financing. This risk is often discussed within the context of

the Capital Structure topics.


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Say investment A and B. Both investments give you an expected return of 10%, but A

has astandard deviation of 15% and therefore a wider spread of possible outcomes than B with

its 7.5%. Obviously, everybody would invest in B rather than in A to avoid unnecessary risk. If

you get the chance to invest in investment A or C with an expected return of 15% and a standard

deviation of 10% its clear that in that situation everybody would prefer C to A. In real life where

there are an almost unlimited range of possibilities to invest moneyand not just in one asset, as

in the example above. This leads us to the next section.

Portfolio Theory

Modern portfolio theory is based on an article Harry Markowitz released in 1952. His

Portfolio Selection Model describes how an investor can reduce the standard deviation of

portfolio returnswhile selecting stocks that are correlated differently.

The Capital Asset Pricing Model (CAPM)

The theory behind the CAPM and all other modern finance theories are based on the

portfolio theory, developed in the early 1950`s by Harry Markowitz. His statement was that an

investor can reduce the standard deviation of portfolio returns by choosing stocks that do not

move exactly together (that are correlated differently).

Furthermore, expected returns and standard deviation are the only two variables that need

to be considered in an investment decision. The intuition behind the CAPM is the insurance

motive of risk adverse investors. The main statement of the CAPM is that one can reduce risk

nicely diversifying ones portfolio.

Capital Market Line (Security Market line)

In the following model it is assumed that an investor can choose portfolios which consist

of a share of a risk-free asset like a treasury bill and a share of risky assets. Capital market line

connects the risk-free asset with the risky market portfolio. This combination creates a greater set

of possible portfolios and a 'new' efficient frontier line.


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AUTOMOBILE INDUSTRY PROFILE

Maruti Suzuki Profile

Maruti Suzuki is India and Nepal's number one leading automobile manufacturer and the

market leader in the car segment, both in terms of volume of vehicles sold and revenue earned.

Until recently, 18.28% of the company was owned by the Indian government, and 54.2% by

Suzuki of Japan. The BJP-led government held an initial public offering of 25% of the company

in June 2003. As of 10 May 2007, Govt. of India sold its complete share to Indian financial

institutions. With this, Govt. of India no longer has stake in Maruti Udyog

Tata Motors Profile

1998- Indian manufacturers Tata Motors have quite the history under their belt, starting

with the company's foundation in 1945 as a locomotive producer. Tata Motors is just one part of

the business group Tata, formerly known as TELCO (Tata Engineering and Locomotive

Company), which also has several other ventures, including a steel making plant and even a tea

producing company.

Tata got into the motoring business in 1954 when it starting producing heavy trucks in a

joint venture with Daimler-Benz AG. So, in 1960. the first truck rolled out of the factory's door

in Pune, India, a copy of a German Daimler truck.

Tata starting exporting heavy-duty trucks but for the local market, they had to come up

with lighter versions because of the infrastructure of the country. The first LCV (Light

Commercial Vehicle) model, the Tata 407, began production in 1986.

Mahindra & Mahindra Profile

Mahindra & Mahindra was set up as a steel trading company in 1945. It soon expanded

into manufacturing general-purpose utility vehicles, starting with assembly under license of the

iconic Willis Jeep in India. Soon established as the Jeep manufacturers of India, M&M later

branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors.


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Today, M&M is the leader in the utility vehicle segment in India with its flagship UV

Scorpio and enjoys a growing global market presence in both the automotive and tractor

businesses.

Over the past few years, M&M has expanded into new industries and geographies. They

entered into the two-wheeler segment by taking over Kinetic Motors in India. M&M also has

controlling stake in REVA Electric Car Company and acquired South Korea's SsangYong Motor

Company in 2011.

Hero Honda Profile

Hero is the brand name used by the Munjal brothers for their flagship company Hero

Cycles Ltd. A joint venture between the Hero Group and Honda Motor Company was

established in 1984 as the Hero Honda Motors Limited At Dharuhera India. Munjal family and

Honda group both own 26% stake in the Company. In 2010, it was reported that Honda planned

to sell its stake in the venture to the Munjal family.

During the 1980s, the company introduced motorcycles that were popular in India for

their fuel economy and low cost. A popular advertising campaign based on the slogan 'Fill it -

Shut it - Forget it' that emphasized the motorcycle's fuel efficiency helped the company grow at a

double-digit pace since inception. The technology in the bikes of Hero Honda for almost 26

years (19842010) has come from the Japanese counterpart Honda.

Hero Honda has three manufacturing facilities based at Dharuhera, Gurgaon in Haryana

and at Haridwar in Uttarakhand.

These plants together are capable of churning out 3 million bikes per year. Hero Honda

has a large sales and service network with over 3,000 dealerships and service points across India.

Hero Honda has a customer loyalty program since 2000, called the Hero Honda Passport

Program.


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Bajaj Auto Profile

Bajaj Autois a major Indian vehicle manufacturer started by a Rajasthani merchant. It is

based in Pune, Maharashtra, with plants in Chakan (Pune), Waluj (near Aurangabad) and Pant

agar in Uttaranchal.

The oldest plant at Akurdi (Pune) now houses the R&D centre ahead. Bajaj Auto makes

and exports automobiles scooters, motorcycles and the auto rickshaw. The Forbes Global 2000

list for the year 2005 ranked Bajaj Auto at 1,946 although it does not feature in the 2010 list.

Over the last decade, the company has successfully changed its image from a scooter

manufacturer to a two wheeler manufacturer. Its product range encompasses scooterettes,

scooters and motorcycles. Its real growth in numbers has come in the last four years after

successful introduction of a few models in the motorcycle segment.

Bajaj Auto came into existence on 29 November 1945 as M/s Bachraj Trading

Corporation Private Limited. It started off by selling imported two- and three-wheelers in India.

In 1959, it obtained license from the Government of India to manufacture two- and three-

wheelers and it went public in 1960. In 1970, it rolled out its 100,000th vehicle. In 1977, it

managed to produce and sell 100,000 vehicles in a single financial year. In 1985, it started

producing at Waluj near Aurangabad.

In 1986, it managed to produce and sell 500,000 vehicles in a single financial year.

According to the authors of Globality: Competing with Everyone from Everywhere for

Everything, Bajaj has grown operations in 50 countries by creating a line of value-for-money

bikes targeted to the different preferences of entry-level buyers

Auto Mobile Industry Information

Driving the most luxurious car has been made possible by the stiff competition in the

automobile industry in India, with overseas players gathering the same momentum as the

domestic participants.


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Every other day, we have been hearing about some new launches, some low cost cars - all

customized in a manner such that the common man is not left behind. In 2009, the automobile

industry is expected to see a growth rate of around 9%, with the disclaimer that the auto industry

in India has been hit badly by the ongoing global financial crisis.

The automobile industry in India happens to be the ninth largest in the world. Following

Japan, South Korea and Thailand, in 2009, India emerged as the fourth largest exporter of

automobiles.

Several Indian automobile manufacturers have spread their operations globally as well,

asking for more investments in the Indian automobile sector by the MNCs.

Potential of the Automobile industry In 2008, Hyundai Motors alone exported 240,000cars made in India. Nissan Motors plans to export 250,000 vehicles manufactured in its India

plant by 2011. Similar plans are for General Motors.

OILAND GAS INDUSTRY

Chennai Petroleum Corporation Profile

Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras

Refineries Limited (MRL) is located at Manali (Tamil Nadu), near Chennai, Tamilnadu.

It was formed as a joint venture in 1965 between the Government of India (GOI),

AMOCO and National Iranian Oil Company (NIOC) having a share holding in the ratio 74%:

13%: 13% respectively. From the grassroots stage CPCL Refinery was set up with an installed

capacity of 2.5 Million Tonnes Per Annum (MMTPA) in a record time of 27 months at a cost of

Rs. 43 crore without any time or cost over run.

In 1985, AMOCO disinvested in favour of GOI and the shareholding percentage of GOI

and NIOC stood revised at 84.62% and 15.38% respectively. Later GOI disinvested 16.92% of

the paid up capital in favor of Unit Trust of India, Mutual Funds, Insurance Companies and

Banks on 19 May 1992, thereby reducing its holding to 67.7 %.


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The public issue of CPCL shares at a premium of Rs. 70 (Rs. 90 to FIIs) in 1994 was

oversubscribed to an extent of 27 times and added a large shareholder base of over 90000.As a

part of the restructuring steps taken up by the Government of India, Indian Oil Corporation

Limited ( IOCL) acquired equity from GOI in 2000-01 Currently IOC holds 51.88% while NIOC

continued its holding at 15.40%.

Indian Oil Corporation Profile

Indian Oil began operation in 1964 as Indian Oil Company Ltd. The Indian Oil

Corporation was formed in 1964, with the merger of Indian Refineries Ltd. Feroze Gandhi was

the first chairman of Indian Oil Corporation Limited.

Product

Indian Oils product range covers petrol, diesel, LPG, auto LPG, aviation turbine fuel,

lubricants, naphtha, bitumen, paraffin, kerosene etc. Xtra Premium petrol, Xtra Mile diesel,

Servo lubricants, Indane LPG, Autogas LPG, Indian Oil Aviation are some of its prominent

brands.

Recently Indian Oil has also introduced a new business line of supplying LNG (liquefied

natural gas) by cryogenic transportation. This is called "LNG at Doorstep". LNG headquarters

are located at the Scope Complex, Lodhi Road, Delhi

Bharat Petroleum Corporation Profile

The 1860s saw vast industrial development. A lot of petroleum refineries came up. An

important player in the South Asian market then was the Burmah Oil Company Ltd. Though

incorporated in Scotland in 1886, the company grew out of the enterprises of the Rangoon Oil

Company, which had been formed in 1871 to refine crude oil produced from primitive hand dug

wells in Upper Burma.

The search for oil in India began in 1886, when Mr. Goodenough of McKillop Stewart

Company drilled a well near Jaypore in upper Assam and struck oil. In 1889, the Assam Railway


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and Trading Company (ARTC) struck oil at Digboi marking the beginning of oil production in

India.

While discoveries were made and industries expanded, John D Rockefeller together with

his business associates acquired control of numerous refineries and pipelines to later form the

giant Standard Oil Trust. The largest rivals of Standard Oil - Royal Dutch, Shell, Rothschilds -

came together to form a single organisation....: Asiatic Petroleum Company to market petroleum

products in South Asia.

In 1928, Asiatic Petroleum (India) joined hands with Burmah Oil Company - an active

producer, refiner and distributor of petroleum products, particularly in Indian and Burmese

markets. This alliance led to the formation of Burmah-Shell Oil Storage and Distributing

Company of India Limited. A pioneer in more ways than one, Burmah Shell began its operations

with import and marketing of Kerosene.

This was imported in bulk and transported in 4 gallon and 1 gallon tins through rail, road

and country craft all over India. With motor cars, came canned Petrol, followed by service

stations. In the 1930s, retail sales points were built with driveways set back from the road;

service stations began to appear and became accepted as a part of road development. After the

war Burmah Shell established efficient and up-to-date service and filling stations to give thecustomers the highest possible standard of service facilities.

Hindustan Petroleum Corporation Profile

Which has capacity of 9 Hindustan Petroleum Corporation (HPCL) is one of the leading

petroleum companies in India. Established in 1953, its business activities ventures include

exploration, production, and marketing of petroleum and petroleum-related products.

It has two refineries -- one located in Mumbai with of 5.5 million metric tonnes per

annum (MMTPA) capacity and another in Vishakhapatnam with 7.5 MMTPA capacity. It owns

and operates the largest lube refinery in India with capacity of 335 TMT and accounts for 40% of

Indias total lube oil production. HPCL has a 16% market share in refining and marketing in

India. It holds 16.95% equity stake in Mangalore Refinery & Petrochemicals MMTPA.


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ONGC Profile

ONGC (Oil and Natural Gas Corporation Limited) is India's leading oil & gas exploration

company. ONGC has produced more than 600 million metric tonnes of crude oil and supplied

more than 200 billion cubic metres of gas since its inception. Today, ONGC is India's highest

profit making corporate. It has a share of 77 percent in India's crude oil production and 81 per

cent in India's natural gas production.

The origins of ONGC can be traced to the Industrial Policy Statement of 1948, which

called for the development of petroleum industry in India. Until 1955, private oil companies such

as Assam Oil Company at Digboi, Oil India Ltd (a 50% joint venture between Government of

India and Burmah Oil Company) at Naharkatiya and Moran in Assam, and Indo-Stanvac

Petroleum project (a joint venture between Government of India and Standard Vacuum Oil

Company of USA) at West Bengal, were engaged in exploration work.

The vast sedimentary tract in other parts of India and adjoining offshore were largely

unexplored. In 1955, Government of India decided to develop the oil and natural gas resources in

the various regions of the country as part of the Public Sector development. To achieve this

objective an Oil and Natural Gas Directorate was set up in1955, as a subordinate office under the

then Ministry of Natural Resources and Scientific Research.

The Industrial Policy Resolution of 1956 placed mineral oil industry among the schedule

'A' industries. In August 1956, to ensure efficient functioning of the Oil and Natural Gas

Directorate, the Directorate was raised to the status of a commission with enhanced powers. In

October 1959, the Commission was converted into a statutory body by an act of the Indian

Parliament, which enhanced powers of the commission further. In 1960s, ONGC found new

resources in Assam and established new oil province in Cambay basin (Gujarat).

In early 1970s went offshore and discovered a giant oil field in the form of Bombay

High. After liberalization in 1991, ONGC was re-organized as a limited Company under the

Company's Act, 1956 in February 1994.


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Recently, ONGC has made six new discoveries, at Vasai West (oil and gas) in Western

Offshore, GS-49 (gas) and GS-KW (oil and gas) in Krishna-Godavari Offshore, Chinnewala

Tibba (gas) in Rajasthan, and Laipling-gaon (oil and gas) and Banamali (oil), both in Assam.

ONGC has a fully owned subsidiary, ONGC Videsh Ltd (OVL) that looks for exploration

opportunities in other parts of the world. OVL is pursuing exploration of oil and gas in Russia,

Iran, Iraq, Libya Myanmar and other countries. ONGC has also acquired 72% stake in MRPL

with full management control of the 9.69 tonne, state-of-the-art refinery.

Oil and Gas Information

Automobile sale have been surging every year. Car sales are up by nearly 30%, heavy &

medium commercial vehicle sales have climbed an even more steep 40%, consumption of diesel

and LPG are on a steep rise.

That should be pretty good news for the industry, which is counting on surging sales and

economic boom to absorb the huge refining capacity that has built up in the country. The

interesting story is that oil products consumption has started picking up in line with the economic

boom, though with a certain lag. Going forward, we should see much larger pick- up in sales of

oil products in line with the GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining

majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL),

Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to

analysts tracking the sector, refining margins are now at $8 per barrel, one of the highest levels

in many years. And these margins have stayed high despite a rise in prices of crude oil. For

integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are even more

substantial and their numbers may look very impressive.

However, sentiment for the sector would be significantly impacted by the performance of

the biggest oil company in the country- ONGC .The company is by far the biggest player in the


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oil exploration & production sector and has a presence in the refining sector through its arm-

MRPL. As crude prices have held firm in the global markets over the past months, the company

should show good performance for the year. The company should benefit from a surge in

demand in this region.

According to CLSA. "While Asia (excluding, Middle East) accounts for only 10% of oil

production, it accounts for as much as 25% of oil consumption and refining capacity. Oil

consumption in Asia is returning, driven mainly by a surge in Chinese demand over the shorter

term.

With most Asian economies on track for a solid recovery, we would expect demand

growth to top 3-4% in the next few years leading to a quick recovery. With Asia forming 45% of

global incremental demand between 2000 and 2010, we expect Asian refining margins to remain

at higher than global averages".

OBJECTIVES OF THE STUDY

To evaluate the risk of the selected sectors.

To measure the return of the selected sectors.

To ascertain the relationship between the share price and indices.

SCOPE OF THE STUDY

The scope of the study is limited to Indian stock market. The recommendation in

this study only subject to the Indian capital market situation. The present studies will mainly

focusing on the 2years performance of automobiles and oil & gas industry companies in India.

This study reviles the various factors that are to be considering for the risk return of companies.

In the investors point of view this study will help them to understand how a

companies is evaluated against benchmark indices also this will definitely enable


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them to find out how the companies had performed for the last two years. For the

new investors the study will serve as a guideline to know about the investment

pattern in companies.

REVIEW OF LITERATURE

In the area of risk and return analysis two well known economist made effort to study the

relation between risk and return and they are the people who quantify the risk and return aspects

of an instrument .they are Harry markowitz and William Sharpe.

Very broadly the investment process consists of two tasks. The first task is security analysis

which focuses on assessing the risk and return characteristics of the available investment

alternatives. The second task is portfolio selection which involves choosing the best possible

portfolio from the set of feasible portfolio.

Portfolio theory, originally proposed by Harry markowitz in the 1950s was the first formal

attempt to quantify the risk of portfolio and develop a methodology for determining the optimal

portfolio .prior to the development of portfolio theory ,investors dealt with the concept of return

and risk somewhat loosely .Harry markowitz was the first person to show quantitatively why and

how diversification reduce risk .in recognition of his seminal contribution in this field he was

awarded the Nobel prize in economics in 1990.

Harry markowitzdeveloped an approach that helps the investors to achieve his optimal

portfolio position .in this contest William Sharpe and others try to find out an answer for a

question ,what is the relationship between risk and return and they developed capital asset

pricing theory .(CAPM)

The CAPM, in essence, predicts the relationship between the risk of an asset and its

expected return .this relationship is very useful in two important ways .first, it produces a bench

mark for evaluating various instrument .second it helps us to make an informal guess about the

return that can be expected from an assets that has not yet been traded in the market.


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De Bondt and Thayler study the price in relation to book value in a universe of all

NYSE and American Stock Exchange equity issue. It has explained the relation between the

market price and book value, with stock being assigned in quintiles from lowest price to book

ratios. The earning yields effect on stock return is significantly positive only in January for the

sub period.

Piotroski investigates whether fundamental analysis can be used to provide abnormal

returns, and right shift the returns spectrum earned by a value investor. He focused on high book

to 20 market securities, and show that the mean return earned by a high book to market investor

can beshifted to the right by at least 7.5% annually

The authors developed portfolio based on four fundamental conditions namely: Single

Value P/E, Market Price


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The net cash flow to share holders after paying for future investment is sometime s

knows as companys cash flow.This analysis is done at portfolio return on the excess returns

for the market factors using CAPM.

REASEARCH METHODOLOGY

RESEARCH DESIGN

This project is based on exploratory research with both qualitative analysis as well as

quantitative analysis. The research methodology adopted is based on secondary data. The

various sources of secondary data include

Internet.

Share prices of different NSE Sensex companies.

Information provided by ARA Securities.

Magazine.

STATISTICAL TOOLS

The following measures were used to analyze the data collected;

MS excel is used in order to calculate standard deviation and beta as well as to draw charts.

The other kinds of formulae used are

Computation of Rate of Return

RATEOF

RETURN

=(CLOSING STOCKOPENING STOCK) /(OPENING STOCK * 100)


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Alpha ()

Alpha represents the difference between a mutual funds actual performances that would

be expected based on the level of risk taken by the manager. If a fund produced the expected

return for the level of risk assumed, the fund would have an alpha equal to zero.

X and Y respectively represent the arithmetic averages of x and y.

An alpha of 1.0 means the fund outperformed the market 1.0%. A positive alpha is the

extra return awarded to the investor for taking additional risk rather than accepting the market

return.

Beta:

Beta is the slope of the characteristic regression line. Beta describes the relationship

between the stock and the index returns.

Standard Deviation

Risk is the chance that an investment's actual return will be different than expected.

Technically, this is measured in statistics by standard deviation. Risk means you have the

possibility of losing some, or even all, of our original investment. Standard deviation is a

statistical measurement that measures the risk of the securities. It is to be computed with the

following formula.

Variance

The variancemeasures the fluctuation of the observations around their mean. The larger

the value of variance, the greater the fluctuation. The population variance is given by:

2 2

1

1( )

n

i

i

Xn

Alpha = Y-beta* X
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WhereXis the sample mean and nis the number of observations in the sample. In most

applications, the sample variance is calculated rather than the population variance because

calculation of the latter is possible only when every value in the population is known (i.e. the

population variance has no practical application for empirical analyses).

Dividing by (n-1) instead of by n (which may seem more logical) is done to make the

sample variance correspond to . Division by n can be proven to produce an s-value that

underestimates the population variance.

Since our analyses are based on sample data with no complete understanding of the

population, the sample variance from now on will be referred to as simply variance.

Correlation

The strength of the linear association between two variables is quantified by the

correlation coefficient.

Given a set of observations (x1, y1), (x2,y2),...(xn,yn), the formula for computing the

correlation coefficient is given by

The correlation coefficient always takes a value between -1 and 1, with 1 or -1 indicating

perfect correlation (all points would lie along a straight line in this case). A positive correlation

indicates a positive association between the variables (increasing values in one variable

correspond to increasing values in the other variable), while a negative correlation indicates a

negative association between the variables (increasing values is one variable correspond to

decreasing values in the other variable). A correlation value close to 0 indicates no association

between the variables.


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Since the formula for calculating the correlation coefficient standardizes the variables,

changes in scale or units of measurement will not affect its value. For this reason, the correlation

coefficient is often more useful than a graphical depiction in determining the strength of the

association between two variable.

Capital Asset Pricing Model

A model that describes the relationship between risk and expected return and that is used

in the pricing of risky securities. The

general idea behind CAPM is that

investors need to be compensated in two

ways: time value of money and risk. Thetime value of money is represented by the

risk-free (rf) rate in the formula and

compensates the investors for placing

money in any investment over a period of

time. The other half of the formula

represents risk and calculates the amount of compensation the investor needs for taking

on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of

the asset to the market over a period of time and to the market premium (Rm-rf).

LIMITATION OF THE STUDY

The study is purely based on published data.

The study is limited to two years.

Only 5companies from Automobiles industries Oil and Gas Industries


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Automobile Sector

Table showing Risk Analysis

Interpretation

From the above table it is inferred that beta value of Maruti Suzuki (0.352824726) .This

Company had been taken higher risk than the other company like Tata motors. The risk against

the market risk of Maruti Suzuki was good.

The Hero Honda has higher standard deviation and Tata Motors had and Mahindra

Mahindra and Bajaj Auto. The Company have been taken the moderate risk and also valid the

moderate benefit.

Table showing Volatility Analysis

Interpretation

Company Beta Standard deviation

Maruti Suzuki 0.352824726 7.850632

Tata Motors 0.236793807 12.00778

Mahindra& Mahindra 0.100158112 12.63503

Hero Honda 0.294931849 6.906998

Bajaj Auto 0.049613436 11.15666

Company Standard deviation Variance

Maruti Suzuki 7.850632 61.63242

Tata Motors 12.00778 144.1867

Mahindra &Mahindra 12.63503 159.6439

Hero Honda 6.906998 47.70662

Bajaj Auto 11.15666 124.471


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The above table inferred that volatility of return Mahindra &Mahindra was good and

followed by Tata motors and Bajaj Auto and Maruti Suzuki and Hero Honda. The volatility

ratio of others has to be improved. The company should give more attention to improve and

maintain the optimum level of volatility in year future.

Table showing Return Analysis

Interpretation

The above table shows that the return perception of companies ,Tata Motors had higher

rate return and followed by Maruti Suzuki and Mahindra&Mahindra and Hero Honda and Bajaj

Auto.

COMPANY MEAN RETURN ALPHA

Maruti Suzuki 0.920517 0.557718

Tata Motors 6.005416 5.761928

Mahindra& Mahindra 0.803037 0.700047

Hero Honda 1.178288 0.875018

Bajaj Auto 1.76873 1.717714


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Table showing Risk -Return Analysis

Interpretation

From the above table it is inferred that the Maruti Suzuki (0.352) have taken higher risk

than other companies in case of risk against the market index, followed by Hero Honda (0.294),

and Tata Motors(0.236793807) has taken respectively .The excess return against the risk was

provided highly by Tata Motors, followed byBajaj Auto.

Table showing Relationship Analysis

Company BETA ALPHA

Maruti Suzuki 0.352825 0.557718

Tata Motors 0.236794 5.761928

Mahindra & Mahindra 0.100158 0.700047

Hero Honda 0.294932 0.875018

Bajaj Auto 0.049613 1.717714

Company Correlation

Maruti Suzuki 0.6503852

Tata Motors 0.6705204

Mahindra & Mahindra 0.2969146

Hero Honda 0.4777513

Bajaj Auto 0.1286109


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Interpretation

From the above table it is inferred that the relationship is higher in Tata Motors , Maruti

Suzuki and Hero Honda with the market index.

Table showing CAPM Analysis

Interpretation

It show market price of Maruti Suzuki is highly associated with risk perception followed

by Hero Honda and Tata Motors .

Company CAPM

Maruti Suzuki 40.48652

Tata Motors 29.30962

Mahindra &Mahindra 16.14792

Hero Honda 34.90988

Bajaj Auto 11.27911

Company Beta Standard deviation

CPCL 0.295296 8.753754

HPCL 0.168109 9.224932

IOC 0.087886 12.94676

BPCL 0.171015 7.715803

ONGC 0.110722 16.0702


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OIL AND GAS SECTOR

Table showing Risk Analysis

Interpretation

From the above table it is inferred that beta value of Chennaipetroleum .This Company

had been taken higher risk than the other company like Hindustan. The risk against the market

risk of Chennai petroleum was good.

The BPCL had (7.715803) has standard deviation and HPCL had (9.224932) and IOC

(12.94676) ONGC (16.0702). The Company have been taken the moderate risk and also valid

the moderate benefit.

Table showing Volatility Analysis

Interpretation

The above table inferred that volatility of return ONGC was good . IOCandHPCL and

Chennai petroleum and BPCL , these companies volatility ratio of others has to be improved.

These companies should give more attention to improve and maintain the optimum level of

volatility in future .

Company Standard deviation variance

CPCL 8.753754 76.62821

HPCL 9.224932 85.09936

IOC 12.94676 167.6185

BPCL 7.715803 59.53362

ONGC 16.0702 258.2512


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Table showing Return Analysis

Interpretation

The above table shows that the return perception of BPCL had higher rate return and

followed by HP , Chennai petroleum. IOC and ONGC had a negative return, so these companies

must be taken immediate and groups action to improve the return in year future.

Table showing Risk -Return Analysis

Company Alpha Mean Return

CPCL 0.801259 1.104903

HPCL 0.965291 1.138152

IOC -1.21368 -1.12331

BPCL 1.733708 1.909558

ONGC -3.90522 -3.79137

Company Alpha Beta

CPCL 0.801259 0.295296

HPCL 0.965291 0.168109

IOC -1.21368 0.087886

BPCL 1.733708 0.171015

ONGC -3.90522 0.110722


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Interpretation

From the above table it is inferred that the BPCL(1.733708) have taken higher risk than

other companies in case of risk against the market index, followed by HPCL (0.965291), and

CHENNAI PRTROLEUM(0.801259) has taken respectively . . The excess return against the

risk was provided highly by CHENNAI PETROLEUM, followed by BPCL.

Table showing Relationship Analysis

Interpretation

From the above table it is inferred that the relationship is higher in CHENNAI

PETROLEUM (0.606839), followed by ONGC (0.421836) and HINDUSTAN PETROLEUM

(0.36355) with the market index.

Table showing CAPM Analysis

Company CORRELATION

CPCL 0.606839

HPCL 0.36355

IOC 0.268519

BPCL 0.308454

ONGC 0.421836

Company CAPM

CPCL 34.94497

HPCL 22.69345


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Interpretation

It show market price of Chennai petroleum (34.944) is highly associated with risk

perception followed by BPCL, HP, ONGC and IOC.

Findings

Automobile Sector:

In the Risk analysis the Maruti Suzuki and Mahindra &Mahindra were taken higher risk

against the market risk

In the return analysis Tata motors are comparatively earned higher return.

Tata motors are provided excess return against the risk and if was followed by the

Maruti Suzuki.

Tata motors are having better correlation with market during the study period.

Oil and Gas Sector:

Chennai petroleum has taken the higher than the market risk.

During the period of study BPCL has secured high risk and higher votality.

In the return analysis BPCL are comparatively taken higher return than the other

companies The excess return and low risk has provided by BPCL and Chennai petroleum.

The relationship higher is Chennai petroleum.

Chennai petroleum higher associated with risk perception.

IOC 14.9658

BPCL 22.97339

ONGC 17.16552


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Suggestions

The investors can invest money in Maruti Suzuki and Tata Motors in order to reduce risk.

The relationship between the share price and the market of the Tata motors limited is

very high than the other companies. Therefore the investors can be investing their money

in the above sector; it will be given more return in future.

In the Oil &Gas sector, Chennai petroleum and BPCL has better performed than the

market. So investor is suggested to invest in Chennai petroleum and BPCL in the Oil&

Gas sector.

CONCLUSION

The risk, return and volatility are the most important measurement technique

to measure movements of the share market. It helps to make decision either to buy or sell

the securities. from the analysis, the researcher found that Maruti Suzuki ,Tata Motors

and Hero Honda are in automobile sector and Chennai petroleum and BPCL are in Oil &

Gas sector category have performed better during the study period. Therefore the

investors advice to invest money in purchasing more number of shares in t hese two

emerging sectors to get a better return.

article risk and return

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