project on capm

SHIVAJI UNIVERSITY, KOLHAPUR

SHIVAJI UNIVERSITY, KOLHAPUR

1.1 INTRODUCTIONIn order to show whether the assets are correctly priced, a model must be developed. The capital asset pricing model (CAPM) relates the risk-return trade-off of individual assets to market returns. The basic form of the CAPM is a linear relationship between returns on the individual shares and the stock market returns over time. The CAPM is used a measure of systematic risk that can be compared with other assets in the market. Using this measure of risk can theoretically allow investors to improve their portfolios and managers to find their required rate of return. We would not expect any model to be exactly replicated in practice but if we are to try and use a model to make forecasts about the future we need to have some idea of its relevance and robustness to the real world.

1.2 OBJECTIVES OF STUDY 1. To ascertain the relationship between valuation of securities and returns.2. To test validity of CAPM in the Indian market with HDFC Bank Ltd., ICICI Bank Ltd., Axis Bank, Yes Bank .3. To estimate the value of securities with the help of P/E ratio and CAPM model. 4. To provide suggestions if any to the investor.

1.3 IMPORTANCE OF STUDY All economic models, of which the CAPM is but one, are simplifications of real world. We would not expect any model to be exactly replicated in practice but if we are to try and use a model to make forecasts about the future we need to have some ideas of its relevance to the real world. Casual observation seems supportive of model; historically; investors require higher returns for investing in company equities than in relatively risk free government securities. The investors are also concerned with non diversifiable risk. Managers often use the corporate cost of capital as the required rate of return for new corporate capital investments. To develop this overall cost of capital the managers must have an estimate of the cost of equity capital. To calculate the cost of equity, some mangers estimate the firms beta and use CAPM to determine the firms required return on equity. Using the CAPM to estimate the cost of equity for the firm is relatively common as other equity cost methods require the use of market determined equity price and estimate of future growth rates and dividends for the firms, CAPM is of special interest to managers whose firms are closely held, pay no dividends or have uncertain future rates of growth. Some managers are not satisfied with a single corporate hurdle rate as required rate of return. For firms that have diverse business with different risks, a single rate is believed inadequate to represent a fair return for each business segment. As a result, some managers have developed multiple hurdle rates-one for each business unit or line of business. The CAPM has been adopted to determine directly these multiple rate.

1.4 SCOPE OF STUDY The scope of study was limited to the HDFC Bank, ICICI Bank, AXIS Bank and YES Bank at Samrudhi Investment,Sangli only .

1.5 RESEARCH METHODOLOGY It includes the procedure & the material used for doing the study & getting the results. It shows the sources from where the information has been collected to complete the study. The methodology used for collection of the data is divided into two types:-Primary DataThe primary data are those data which are collected first time and fresh. The data is collected through discussion, interview, schedule and observations in the company with concerned department heads, finance manager and other related officers.Secondary Data The secondary data are those data which are published in books, journals, newspapers, etc. this data is collected from published reports, official records, books and paper of the company.

This study is mainly based on the secondary data. The data has been collected from the following sources: Financial statements of the Company Annual Reports of the Company Company Website Reference Books

1.6 LIMITATIONS OF STUDY1. Data is related for only four securities. 2. The whole data is secondary data related to last five financial year ended with 31/03/2014.3. Since Beta values for last five years were not available, Beta value of last year has been considered for the calculation. 4. There is inadequacy of information regarding the value obtained is high or Low for a specified date.

2.1 INTRODUCTION OF CAPM Capital market has become an integral part of economies of most of the countries. The way securities are priced in capital market has attracted the attention of researchers for long investment in securities market requires the study of the relationship between risks and returns. Researchers in securities market have attempted to understand the relationship between risk and returns and the way securities are priced in the market. These researchers have assumed rational investors and constructed the general equilibrium models of security prices and returns. Sharpe (1964), Lintner (1965) and Mossin(1968) have independently developed the standard form of general equilibrium model for asset returns in securities market. This model has come to be known as Sharpe-Lintner-Mossin form of Capital Asset Pricing Model (CAPM). This model is based on many assumptions about capital market. However, it has served to understand the complex relationship between securities returns and risks. The studies conducted by Brennan(1971), Black(1972), Fama and Macbeth(1973), Fama(1976), Elton and Gruber (1978,1996), Pettit and Stanley(1979), Mayers(1972), Brito(1977,1978), Lintner(1969,1971), Sharpe(1970), Gonedes(1976), Black, Jensen and Scholes(1972), Blume and Frank(1973), Blume and Irwin(1973), Litzenberger and Ramaswamy(1979), Gibbons and Wayne(1985), Shankan(1985a, 1985b, 1987), Fama and French (1992, 1996) have focused on some of the issues related to CAPM. Research finding of these studies have been debated again and again. The empirical avidence against the CAPM by Eama and French (1992, 1996) has generated a lot of debate in the west and has called for major reexamination of the CAPM model. While many studies have been conducted on CAPM in the capital markets of the western countries, there are a few studies in the Indian context studies byVarma(1988), YaIwar(1988), Srinivasan(1988) have generally supported the CAPM theory. Studies by Basu(1977), Gupta and Sehgal(1993), Madhusudhan(1997), Sehgal(1997), Ansari (2000) have questioned the validity of CAPM in Indian markets are scanty and no robust conclusions exist on this model.The riskiness or volatility of share prices, as measured by the standard deviation of returns, is a crucial variable in financial decision making. According to Markowitz (1952, 1959) diversification by investors into a portfolio of assets hedges fluctuations in returns and hence reduces volatility. Thus, there exists a close relationship between the mean and variance of returns in a portfolio of financial assets. The choice of an optimal portfolio in the mean variance(M-V) approach aims at maximizing returns for an overall risk level or vice-versa. But in a dynamic environment characterized by shifting risk profiles, M-V approach loses much of its significance (Fama 1965b). As an extension/ modification of the M-V approach, the capital assets pricing model(CAPM) was proposed by Sharpe (1964). The capital Asset Pricing Model is based on the two parameter portfolio analysis modelThe assumptions underlying this model are Summarized as under:. Investors make investment decisions based on expected return and the variances of security returns.

There exists a risk less asset and investors can lend or invest at the risk less rate and also borrow at this rate. All investments are perfectly divisible. All investors have homogenous expectations with regard to investment horizons and holding periods. There are no imperfections in the capital market to impede investor buying and selling. All security prices fully reflect all changes in future inflation expectations. Capital markets are in equilibrium.In recent times,CAPM has been applied extensively to explain the behavior of stock markets and other financial assets markets. In Sharpes model, for every security active in the market, there can be associated a beta value. A beta value of one indicates movement of the gives stock identical with the market and a value less than one shows under performance of the stock while a value greater than one implies over volatility of the stock return compared to the market. In terms of share prices it indicates elasticity of stock price with respect to the share market price. Riskiness or volatility of returns of a stock in the market can be decomposed into two components. One part is due to the market as a whole and this cannot be diversified away. This is called systematic risk.

For instance, if the market is an efficient and good one; it will show variation in return due to changes in the real world market. Investors holding diversified portfolios are exposed only to systematic risk and they are rewarded in terms of higher expected returns. Systematic risk is the relevant financial variable for investment considerations. The other component is stock specific and can be reduced through diversification into other stocks. This is known as unsystematic risk. This is measured by the residual standard deviation. There is no reward associated with it. 2.2 LIMITATIONS OF CAPM MODEL One of the important outcomes of the CAPM assumptions is that all investors hold a portfolio which is a combination of risk less portfolio and market portfolio. This implies that all investors hold the same combination of market portfolio which contains all risky assets. However, in practice it is impossible to construct a market proxy which contains all assets. Again, the total risk of a portfolio can be decomposed as the sum of systematic plus unsystematic risk. If CAPM holds then the 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 risk, known as unsystematic risk can be reduced to nil by holding a diversified portfolio. Thus, beta is only important from the investors point of view based on their utility function and this decision is independent of other important decisions like financing decision, market conditions, etc. Also, the assumption that the capital market is fully efficient is not realistic. The practical problems with the use of CAPM in investment appraisal are follows:1. It is hard to estimate the risk free rate of return on projects under different economic environment.2. The CAPM is really just a single period model. It is not possible to use the CAPM for projects which last for more than one year.3. It may be hard to estimate the risk-free rate of return.4. Complications in decision-making cannot be modeled easily. 2.3 RISK MEASUREMENT USING-(CAPM)The risk and return model that has been in use the longest and is still the standard is the capital asset pricing model. The model makes two assumptions which it takes into consideration while calculating the hurdle rate. While diversification reduces the exposure of investors to firm specific risk, most investors limit their diversification to holding only a few assets. There are two reasons why investors stop diversifying. In order for an investor to diversify he has to purchase additional stocks in his portfolio, this purchase of additional security leads to transaction costs. Another reason for limiting diversification is that many investors believe that they can find undervalued assets and therefore would hold only those assets and stop buying once they believe they have acquired all undervalued stocks in their portfolio. The capital asset pricing model assumes that there are no transaction costs and that all assets are traded. It also assumes that everyone has access to the same information and that investors cannot find under or overvalued assets in the market. By making these assumptions it allows investors to diversify without additional casts. Therefore, each investor will include each and every traded asset in his portfolio. The fact that this diversified portfolio includes all traded securities in the market is the reason it is called the market portfolio.But now the question that arises is that if every investor in the market holds the identical market portfolio, how do investors reflect their risk aversion in their investment? In the model investors adjust their risk preferences in their allocation decision, where they decide how much to invest in the risk less asset (typically Government bonds) and the allocation toward the market portfolio. Investors who are risk averse might choose to allocate a higher proportion of their wealth in the risk less asset as against the market portfolio and vice versa. The risk of any asset to an investor is the risk added by the asset to the investors overall portfolio, the risk to an investor of an individual asset will be the risk that this asset adds on to that portfolio. Statistically this added risk is measured by the covariance of the asset with the market portfolio. However, the covariance is a percentage value and it becomes difficult to make any judgment of an investment by looking at this value.

Therefore, the risk measure is standardized by dividing the covariance of each asset with the market portfolio. This yields a risk measure called the beta of the asset:

Covariance of asset with market portfolio Beta of an asset= ---------------------------------------------------------- Variance of the market portfolio

Assets which are riskier than average will have betas that are greater than1. The risk less asset will have a beta of 0. Once we accept the assumptions that lead to all investors holding the market portfolio and measure the risk of an asset with the beta, the return one can expect to make from an investment would be Expected return on investment= Risk free rate + Beta (Market return-Risk free rate) Risk free rate: the risk free rate becomes the base from which expected returns are tried to be projected. Essentially, if an investor can make 8% by investing in a risk less security like a Government bond, then the investor will not settle for less than this as an excepted return for investing in a riskier asset. We usually use the interest rate on Government securities to estimate the risk free rate, assuming that such securities have no default risk. Beta of the investment: The beta is the only component in this model which varies from investment to investment. Investments which add more risk to the market portfolio will have higher betas. Risk premium: It is the premium that an investor would demand for investing in equities as an asset class as opposed to the risk free investment. Bringing this entire together, one can use the CAPM to estimate the expected return on stocks for the future. Assuming a bond rate of 8%, the beta of 1.39 for Pantaloon and a risk premium of 4% we can find out the expected return for Pantaloons stock. Expected return= 8%+1.39(4) =13.56% For Pantaloon to be a good investment, the investor would have to expect it to make more than 13.56% as an annual rate in the future. In this model all the market risk is captured in the beta, measured relative to a market portfolio.

2.4 RISK AND RETURNSReturn: Return is the income that we are expecting to get from investment we have made. Return in Investment Management is divided as:A: Cash receipts: Shares- Dividend, Deb, NSC, - InterestB: Price Change: Difference between sale price and purchase price of a security.Total Return= cash receipts = or Price change.Risk: In investment management, risk means the possibility of the expected return not materializing.Risk to investor is that: he may not get the return he has expected. 2.5 TYPES OF INVESTMENT RISK Systematic Risk: Certain factors affect the performance of whole system/economy. The effect of risk associated is called the systematic risk. This is classified into three:1: Market Risk: Even if companies are performing well but the prices of securities start falling unexpectedly. Many events such as Loksabha elections, Change in political party, unexpected war between nations etc. MP of shares affects.2: Interest rate risk: If risk free interest rate changes, the prices of securities may change. If interest rate on Govt. securities increases, the other securities with more risk become unattractive. On the other hand if Gov tint rate decreases securities with high risk may become attractive.The Co which lend money (Banks & FIs) Increases, lenders get more income more profit-better performance. Borrowers pay more interest lesser profit- bad performance.

3: Purchasing Power Risk:Inflation: General prices of commodities and services rise. Consumers will be able to purchase fewer quanta with the same amount of money. PP goes down. They may postpone invt in securities because major portion of income is used for regular needs. Securities having fixed income ie bonds pref. shares are more hit by PP risk. Deflation: The prices of commodities and services fall Purchasing power of consumers increase. These economic conditions have impact on purchasing power of consumer. Unsystematic Risk: The factors which affects the performance of an industry or a company alone. They do not affect system as a whole economy. 1: Business Risk: factors affecting the earnings and dividend of company are business risk. If the fixed cost is more in the cost structure there is more operating leverage and more risk. Internal Business Risk: controllable Eg. Labour relations, cost structures, production efficiency. External Business Risk: uncontrollable by the company. Eg: Government policies, customers preferences, death of efficient Manager. 2: Financial risk: Financial Capital structure of Co. Financial LeverageMore debt more financial risk, where as No Debt no financial risk. 2.6 STANDARD DEVIATIONInvestors and analysts should be at least somewhat familiar with the study of probability distributions. Since the return an investor will earn from investing is not knows, it must be estimated. An investor may expect the total return on a particular security to be 10 percent for the coming year, but in truth this is only a point estimate.

2.7 BETA Beta is a measure of stocks volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A Stock that swing more than the market over time has a beta above 1.0. If a stock moves less than the market, the stocks beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.2.8 PRICE EARNINGS RATIO (P/E RATIO) The P/E Ratio is the most common earnings valuations model. The P/E ratio is the ratio between the price of a share and its EPS. For example, if a share whose EPS is Rs. 10 is having a market price of Rs. 250, then its P/E ratio is 250/10=25. It means that the market price of the share is 25 times that of the EPS. As per P/E ratio approach the value of the share is expected as Value= EPS*P/E ratio.

3.1Name of the Company Samrudhi Investment

3.2 Address of the company:- 106, C-Wing, Chaphalkar complex,Maruti Road,Sangli-416416

3.3 About Samrudhi Investment Firm is a sub-broker under Intime Equity Limited, Mumbai.Firm NameM/S Samrudhi InvestmentEstablished21 august 2011Accounts53Intraday 9 to 12 and other investors Services availableBSE, NSE-F&O

3.4 About Intime Equities Ltd Trade Name: INTIME EQUITIES LIMITEDOLD NAME 1 OF MEMBER: FORTUNE EQUITY BROKERS (INDIA) LIMITEDOLD NAME 2 OF MEMBER: FORTUNE FINANCIAL SERVICES (INDIA) LTDREGISTERED OFFICE :K.K.CHAMBERS, 2NDFLOOR, SIR PURUSHOTTAMDAS THAKURDAS MARG OFF D.N.ROAD, FORT MUMBAI-400001.Corporate Email : [email protected] Equity Limited Company is a company incorporated under the provisions of the Companies Act, 1956. The Company Has spread its business all over India.With major thrust on Retail Broking, , the company has strong IPO and Mutual Funds division for the benefit of the clients. Research brings latest reports giving specific developments in the stock market. Being client-focused the company offers internet trading platform. Portfolio Management services offers best schemes based on clients need of wealth creation.Intime Equity Limited is member of National Stock Exchange of India Ltd.,Bombay Stock Exchange Ltd. and many regional exchanges in India.Fortune Financial Services (India) Limited was incorporated in the year 1991 by Mr. J. T. Poonja, Chairman and Mr.Nimish C Shah, Vice Chairman and Managing Director. Fortune Group which comprises the holding company Fortune Financial Services (India) Limited and its wholly-owned subsidiaries, is engaged in providing a range of Financial Services right from Equities and Derivatives trading, Equity Research, Commodities Trading, Portfolio Management Services, Distribution of Mutual Funds, IPO & Insurance products and also Investment banking services.CALCULATION OF RETURN ON SENSEXFirst market returns are calculated by taking high & low values of Sensex from April 2009 to March 2014. Market returns are calculated for each month and their average is taken. Values of high, low and return are given belowMonths2009/10HighLowReturn (%)Months2010/11High

LowReturn (%)

April11492.19246.2920.38April17995.2517276.84.16

May 14930.5411621.328.48May 17536.8615960.159.88

June 15600.314016.9511.30June 17919.6216318.399.81

July 15732.8113219.9919.01July 18237.5617395.584.84

August 16002.4614684.458.98August 18475.2717819.993.68

September 17142.5215356.7211.63September 20267.9818027.1212.43

October 17493.1715993.839.37October 20854.5519822.665.21

November 17290.4815330.5612.78November 21108.6419167.1910.13

December 17530.9416577.785.75December 20552.0320412.760.68

January 17790.3316182.149.94January 20664.818038.4814.56

February 16669.2515651.996.50February 18690.9717295.628.07

March 17793.0116438.458.24March 19575.1617792.1710.02

Average12.70Average7.79

Months2011/12HighLowReturn (%)Months2012/13HighLowReturn (%)

April19811.1419015.054.19April17664.117010.163.84

May 19253.8717786.138.25May 17432.3315809.7110.26

June 18873.3917314.389.00June 17448.4815748.9810.79

July 19131.718131.865.51July 17631.1916598.486.22

August 18440.0715765.5316.96August 17972.5417026.975.55


October 17908.1315745.4313.74October 19137.2918393.424.04



January 17258.9715358.0212.38January 20203.6619508.933.56


March 18040.6916920.616.62March 19754.6618568.436.39


Continued

Months2013/14HighLowReturn (%)

April19622.6818144.228.15

May 20443.6219451.265.10

June 19860.1918467.167.54

July 20351.0619126.826.40

August 19569.217448.7112.15

September 20739.6918166.1714.17

October 21205.4419264.7210.07

November 21321.5320137.675.88

December 21483.7420568.74.45

January 21409.6620613.623.86

February 21140.5119963.125.90

March 22467.2120920.987.39

Average7.59

Return on Index = High-Low/Low*100Average Market Return = Total of return on Index/ number of years Average Market Return= 12.70+7.79+9.94+6.03+7.59 5 = 8.81 %The average market return for the financial 2009/10 found out to be 12.70% that of 2010/11 was 7.79%; similarly for the three consecutive years market return were i.e. For 2011/12, 2012/13 & 2013/14 were 9.94%, 6.03% & 7.59% respectively. The average market return of the total five years i.e. from April 2009 to March 2013 found out to be 8.81%.


April227.61903419.54April401.98378.666.16

May 299.6222.0234.94May 399.00357.0011.76

June 316.00270.5616.79June 401.8366.149.74

July 309.76266.616.19July 426.8379.412.49

August 305.0270.6612.69August 448.1409.89.35


October 347.46321.008.24October 503.6447.6212.51



January 358.94310.4515.62January 479.77399.420.12


March 397.2341.316.38March 478.00412.0016.02



April488.00455.007.25April557.7515.78.14

May 480.00442.008.60May 556.95486.0014.60

June 503.00454.0010.79June 565.00485.116.47

July 519.5481.757.84July 593.55560.255.94

August 495.65435.513.81August 609.7577.35.61


October 496.9437.0013.71October 644.9604.56.68



January 501.05419.3519.48January 690.00641.37.59


March 533.00493.28.07March 659.5602.009.55


3.3 HDFC BANK Monthly high, Low & return of the stock HDFC BANK; are given below

Continued


April704.00612.4514.95

May 727.00668.358.78

June 701.00620.0013.06

July 696.9605.115.17

August 637.8528.0020.80

September 689.9558.423.55

October 688.00610.0012.79

November 688.00629.059.37

December 714.8650.009.97

January 685.00625.29.56

February 682.15618.0010.38

March 760.5661.1515.03

Average13.65

CALCULATIONS OF HDFC BANKReturn on security =High-Low/Low*100Average return on security = Total of Average /Number of years

YearAverage

2009/1016.22

2010/1112.44

2011/1212.67

2012/139.25

2013/1413.65

Total64.23

= 64.23/5 =12.84%

CALCULATION OF DIVIDEND YearDividend(Rs.)Dividend Increase/ Decrease(%)

2009/1010-

2010/111220

2011/1216.537.5

2012/134.3-73.93

2013/145.527.90

Total48.311.47

Average Dividend (Rs) = Total of dividend/5 =48.3/5 = 9.66 Expected Dividend (%) = 20+37.5-73.93+27.90 /4= 11.47/4 =2.87% i.e.2.87Average growth in Dividend (Rs.) = 5.66 (5.5+0.16)

Risk Free Return = 8% Beta = 0.83Market return = 8.81%

CALCULATION OF BETA OF SECURITY:-YearReturn on securityAverage on securityDeviation(D1)Return on IndexAverage on IndexDeviation (D2)D1*D2

2009/1016.2212.843.3812.708.813.8913.15

2010/1112.4412.84-0.47.798.81-1.020.40

2011/1212.6712.84-0.179.948.811.13-0.19

2012/139.2512.84-3.596.038.81-2.789.98

2013/1413.6512.840.817.598.81-1.22-0.99

Total22.14

Covariance = Total of D1*D2 / 5 =4.43STANDARD DEVIATION OF SECURITY (S.D.):- YearDeviation(D1) D1 square Deviation(D2) D2 square

2009/103.3811.423.8915.13

2010/11-0.40.16-1.021.04

2011/12-0.170.031.131.28

2012/13-3.5912.89-2.787.73

2013/140.810.66-1.221.49

Total25.16Total26.67

Variance on security= Total of D1 square / 5 = 25.16 /5 = 5.03S.D = 2.24Variance on Index= Total of D2 square /5 = 26.67 /5 =5.33

Beta = Covariance of Security / Variance of Index =4.44 /5.33=0.83

According to CAPM, Return(R) = Risk Free Return + Beta (Market return-Risk Free Return) =8 + 0.83 (8.81-8) =8 + 0.83 (0.81) = 8 + 0.67Return(R) = 8.67%

VALUATION OF SECURITY Calculation for the Average Value of Security Average Value of security= High value for the 52week + Low value for the52 week2Average Value of SecurityYearHigh LowHigh value + Low value/2 Average value of security

2009/10330.63285.98330.63+285.98/2308.31

2010/11454.72404.32454.72+404.32/2429.52

2011/12501.41445.84501.41+445.84/2473.63

2012/13633.53580.98633.53+580.98/2607.26

2013/14697.92615.48697.92+615.48/2656.7

CALCULATION OF CAPITAL APPRECIATION Capital Appreciation (CA) = Closing value -Opening Value----------------------------------------------- *100 Opening ValueYearAverage value of security Opening Value Closing Value CA= CV -OV -----------*100 OV CA (%)

2009/10308.31308.31---

2010/11429.52429.52308.31121.21/308.31*10039

2011/12473.63473.63429.5244.11/429.52*10010

2012/13607.26607.26473.63133.63/473.63*10028

2013/14656.7656.7607.2649.44/607.26*1008

Total 85

Average Capital Appreciation = 39 + 10 + 28 + 8 /4 = 21 % Expected value 2014/15 = 656.7 + 656.7*21% = 656.7 + 137.81 = 794.61 Expected Market Price of security on 2014/15(Rs.) =CA +Expected dividend/CAPM return *100/1 = 137.81+5.66/8.67*100/1 = 143.47/8.67*100/1 = 1654

CALCULATION OF P/E RATIO P/E Ratio = M.P/EPS YearEPSAverage Value of Security( M.P)P/E Ratio

2009/1052.77308.315.84

2010/1164.42429.526.67

2011/1284.40473.635.61

2012/1322.02607.2627.58

2013/1428.27656.723.23

Average P/E Ratio = 5.84 + 6.67 + 5.61 + 27.58 + 23.23 5 = 13.79 CALCULATION OF EPS - YearEPSEPS Raised (%)

2009/1052.77-

2010/1164.4222

2011/1284.4031

2012/1322.02-73.91

2013/1428.2728.38

Expected Future EPS = 22 + 31 73.91 + 28.38 /4 = 1.87 % i.e. 0.52Expected future EPS = 28.27 + 0.52 = 28.79 Expected Market Price of security = P/E Ratio * EPS = 13.79*28.79 = 397.01 DATA INTERPRETATION OF HDFC BANK The average market return for the financial year 2009/10 found out to be 16.22% that of 2010/11 was 12.44%; similarly for the three consecutive years market return were i.e. for 2011/12, 2012/13 and 2013/14 were 12.67%, 9.25% and 13.62% respectively. The average return for the five year comes to 12.84%. The Dividend given by the company during the financial year 2009/10 was 10; for 2010/11 dividends gives by the company was 12. The next year i.e. in 2011/12 dividend given by the company was 16.5. For the year 2012/13 the dividend given by the company was 4.3. And in 2013/14 the dividend declared by the company was 5.5. The average dividend for the five 3.5 the expected future dividend is 9.5. The Beta for the security is 0.83; risk free rate assumed 8%; market return calculated the figure is 8.81%. According to CAPM the expected return (R) comes Rs.8.67.Capital appreciation for the year 2010/11 was 39 that to in the year 2011/12 was 10, for 2012/13 and 2013/14 was 28 & 8% respectively. The expected trade of Rs. 794.61.and the expected future return is 1654. The average value of security for the five financial years are calculated by taking average of 52week high and low and taking EPS value for same financial year. The P/E ratios are calculated by dividing average market price by EPS. The P/E ratio for 2009/10 was 5.84 that to for the year 2010/11 were 6.67 and for the year 2011/12 P/E ratio was 5.61, 2012/13 was 27.58 & 2013/14 was 23.23. The average P/E ratio was 13.79 which are used for valuation of security for 2014/15 i.e. 397.01.The market price of the share in July 14 is Rs.839.65.


April96.564.848.92April201.9180.7811.68

May159.497.4263.62May191.48160.6619.18

June155.9130.2519.69June181.76161.0012.89

July161.4121.3433.01July187.34165.9612.88

August160.76138.1216.39August204.6181.8912.49

September181.68144.825.47September227.00192.4717.94

October196.74151.2530.08October234.73215.009.18

November187.8154.6221.46November255.4218.6816.79

December183.3160.114.49December239.92208.2415.21

January181.46154.626.75January231.6198.716.56

February177.3157.412.64February214.4188.0314.02

March193.98177.029.58March225.2196.0014.90



April227.58214.646.03April183.5165.5710.83

May223.74200.4511.62May179.00153.416.69

June219.78200.89.45June180.94153.5917.81

July222.2200.810.66July194.64177.009.97

August211.8165.0028.36August197.71179.5310.13


October190.65152.4125.09October220.48206.496.78



January181.28137.0332.30January246.2228.617.69


March191.52168.713.53March230.17199.415.43


3.4 ICICI BANK Monthly high, Low & return of the stock ICICI BANK; are given below

Continued


April237.6196.7220.78

May247.38221.9311.47

June233.29204.114.30

July215.36178.420.72

August185.15158.0017.18

September213.8155.5149.06

October225.97176.8127.80

November227.97180.3326.42

December241.24200.0020.62

January223.6193.0015.85

February209.98188.8511.19

March254.58204.4524.52

Average21.66

Calculations of ICICI BANKReturn on security =High-Low/Low*100Average return on security = Total of Average /Number of years YearAverage

2009/1026.84

2010/1114.48

2011/1218.05

2012/1312.57

2013/1421.66

Total93.6

= 93.6/5 =18.72%


2009/1011-

2010/11129

2011/121416

2012/1316.517

2013/142021

Total73.563

Average Dividend (Rs) = Total of dividend/Number of years =73.5/5 = 14.7 Expected Dividend (%) = 9+16+17+21 /4 = 63/4 =15.75% i.e. 3.15Average growth in Dividend (Rs.) = 23.15



2009/1024.8418.726.1212.708.813.8923.81

2010/1114.4818.72-4.247.798.81-1.024.32

2011/1218.0518.72-0.679.948.811.13-0.76

2012/1312.5718.72-6.156.038.81-2.7817.09

2013/1421.6618.722.947.598.81-1.22-3.59

Total40.87

Covariance = Total of D1*D2 / 5=8.17Standard Deviation OF SECURITY (S.D.):- YearDeviation(D1) D1 square Deviation(D2) D2 square

2009/106.1237.453.8915.13

2010/11-4.2417.98-1.021.04

2011/12-0.670.451.131.28

2012/13-6.1537.82-2.787.73

2013/142.948.64-1.221.49





VALUATION OF SECURITY

Calculation for the Average Value of Security Average Value of security= High value for the 52week + Low value for the52 week 2

Average Value of SecurityYearHigh LowHigh value + Low value/2 Average value of security

2009/10169.69137.64169.69+137.64/2153.67

2010/11216.28188.95216.28+188.95/2202.62

2011/12199.77170.96199.77+170.96/2185.37

2012/13211.86188.82211.86+188.82/2200.34

2013/14226.33188.18226.33+188.18/2207.26

CALCULATION OF CAPITAL APPRECIATION Capital Appreciation (CA) = Closing value -Opening Value----------------------------------------------- *100 Opening Value

YearAverage value of security Opening Value Closing Value CA= CV -OV -----------*100 OVCA (%)

2009/10153.67153.67---

2010/11202.62202.62153.6748.95/153.67*10031

2011/12185.37185.37202.62-17.25/202.62*100-8.51

2012/13200.34200.34185.3714.97/185.37*1008.08

2013/14207.26207.26200.346.92/200.34*1003.45

Total 34.02

Average Capital Appreciation = 31 8.51 + 8.08 + 3.45 /4 = 34.02 % Expected value 2014/15 = 207.26 + 207.26*8.51% = 207.26 + 17.64 = 224.9Expected Market Price of security on 2014/15(Rs.) =CA +Expected dividend/CAPM return *100/1 = 17.64+23.15/8.69*100/1 = 40.79/8.69*100/1 = 469.39


2009/1033.76153.674.55

2010/1136.10202.625.61

2011/1244.73185.374.14

2012/1356.09200.343.57

2013/1472.17207.262.87

Average P/E Ratio = 4.55 + 5.61 + 4.14 + 3.57 + 2.87 5 = 4.15CALCULATION OF EPS - YearEPSEPS Raised (%)

2009/1033.76-

2010/1136.102.34

2011/1244.738.63

2012/1356.0911.36

2013/1472.1716.08

Expected Future EPS = 2.34+8.63 + 11.36 + 16.08 /4 = 21.23 % i.e. 15.32Expected future EPS = 15.32 + 72.17 = 87.49Expected Market Price of security= P/E Ratio * EPS = 87.49*4.15 = 363DATA INTERPRETATION OF ICICI BANK The average market return for the financial year 2009/10 found out to be 26.84% that of 2010/11 was 14.48%; similarly for the three consecutive years market return were i.e. for 2011/12, 2012/13 and 2013/14 were 18.05%, 12.57% and 21.66% respectively. The average return for the five year comes to 18.72%. The Dividend given by the company during the financial year 2009/10 was 11; for 2010/11 dividends gives by the company was 12. The next year i.e. in 2011/12 dividend given by the company was 14. For the year 2012/13 the dividend given by the company was 16.5. And in 2013/14 the dividend declared by the company was 20. The average dividend for the five 14.7 the expected future dividend is 20.63. The Beta for the security is 0.85; risk free rate assumed 8%; market return calculated the figure is 8.81%. According to CAPM the expected return (R) comes Rs.8.69.Capital appreciation for the year 2010/11 was 31% that to in the year 2011/12 was 8.51%, for 2012/13 and 2013/14 was 8.08%& 3.45% respectively. The expected trade of Rs. 224.9.and the expected future return is 469.39. The average value of security for the five financial years are calculated by taking average of 52week high and low and taking EPS value for same financial year. The P/E ratios are calculated by dividing average market price by EPS. The P/E ratio for 2009/10 was 4.55 that to for the year 2010/11 were 5.61 and for the year 2011/12 P/E ratio was 4.14, 2012/13 was 3.57 & 2013/14 was 2.87. The average P/E ratio was 4.15 which are used for valuation of security for 2014/15 i.e. 363.The market price of the share in July 14 is Rs.301.

3.5 AXIS BANK

Monthly high, Low & return of the stock AXIS BANK; are given belowMonths2009/10HighLowReturn (%)Months2010/11HighLowReturn (%)

April113.9880.142.30April257.4225.813.99

May169.8113.849.21May263.6229.3214.95

June180.2135.4633.03June253.6234.648.08

July193.8141.0337.42July279.74243.2115.02

August187.6159.4217.68August277.00255.658.35


October209.6180.0016.44October321.6286.512.25



January223.6193.4315.60January275.4239.215.13


March243.08219.6410.67March288.74246.617.09



April292.11254.0015.00April245.2215.1813.95

May259.95235.1210.56May225.4184.422.23

June263.2240.229.57June214.4188.8613.52

July268.4204.6831.13July216.36198.628.93

August 273.42198.4237.80August224.38198.0013.32


October238.8189.2726.17October249.28216.0015.41



January218.00156.938.94January303.00268.812.72


March256.8219.0217.25March285.33255.211.81


Continued


April303.72239.0027.08

May309.8282.369.72

June288.89241.8819.44

July271.66203.4633.52

August232.6157.1246.04

September234.74152.853.63

October252.00202.5437.27

November251.4202.3324.25

December268.1232.115.51

January254.00221.814.52

February253.8216.6817.13

March294.96249.4618.24

Average26.36

CALCULATIONS OF AXIS BANKReturn on security =High-Low/Low*100Average return on security = Total of Average / Number of years

YearAverage

2009/1023.47

2010/1115.08

2011/1223.46

2012/1314.22

2013/1426.36

Total102.59

= 102.59/5 =20.52%


2009/1010-

2010/111220

2011/121416.66

2012/131614.28

2013/141812.5

Total7063.44

Average Dividend (Rs) = Total of dividend/Number of years =70/5 = 14 Average growth in Dividend (%) = 20+16.66+14.28+12.5/4 = 63.44/4=15.86% i.e.2.85 Expected Dividend (Rs.) = 20.85 (18+2.85)



2009/1023.4720.522.9512.708.813.8911.48

2010/1115.0820.52-5.447.798.81-1.025.55

2011/1223.4620.522.949.948.811.133.32

2012/1314.2220.52-6.36.038.81-2.7817.51

2013/1426.3620.525.847.598.81-1.22-7.12

Total30.74

Covariance = Total of D1*D2 / 5 =6.15Standard Deviation OF SECURITY (S.D.):- YearDeviation(D1) D1 square Deviation(D2) D2 square

2009/102.958.703.8915.13

2010/11-5.4429.59-1.021.04

2011/122.948.641.131.28

2012/13-6.339.69-2.787.73

2013/145.8434.11-1.221.49



Beta = Covariance of Security / Variance of Index =6.15/5.33=1.15



Calculation for the Average Value of Security Average Value of security= High value for the 52week + Low value for the52 week 2 Average Value of Security

YearHigh LowHigh value + Low value/2 Average value of security

2009/10197.28163.29197.28+163.29/2180.29

2010/11284.19246.89284.19+246.89/2265.54

2011/12250.50204.67250.50+204.67/2227.59

2012/13253.53222.77253.53+222.77/2238.15

2013/14267.97216.79267.97+216.79/2242.38


YearAverage value of security Opening Value Closing Value CA= CV -OV -----------*100 OVCA

2009/10180.29180.29---

2010/11265.54265.54180.2985.25/180.29*10047.28

2011/12227.59227.59265.54-37.95/265.54*100-14.29

2012/13238.15238.15227.5910.56/227.59*1004.64

2013/14242.38242.38238.154.23/238.15*1001.78

Total39.41

Average Capital Appreciation = 47.28 -14.29+ 4.64 + 1.78 /4 = 9.85 % Expected value 2014/15 = 242.38 + 242.38*9.85% = 242.38+ 23.87 = 266.25Expected Market Price of security on 2014/15(Rs.) =CA +Expected dividend/CAPM return *100/1 = 23.87+20.85/8.93*100/1 = 44.72/8.93*100/1 = 500.78


2009/1050.57180.293.57

2010/1162.06265.544.28

2011/1282.54227.592.75

2012/13102.67238.152.32

2013/14110.68242.382.19

Average P/E Ratio = 3.57 + 4.28+ 2.75 + 2.32 + 2.19 5 = 3.02 CALCULATION OF EPS - YearEPSEPS Raised (%)

2009/1050.57-

2010/1162.0622

2011/1282.5433

2012/13102.6724

2013/14110.687

Total 86

Expected Future EPS = 22 + 33 +24 + 7 /4 = 21.5 % i.e. 23.80Expected future EPS = 110.68 + 23.80 = 134.48 Expected Market Price of security= P/E Ratio * EPS = 134.48*3.02 = 418.20

DATA INTERPRETATION OF AXISBANK The average market return for the financial year 2009/10 found out to be 23.47% that of 2010/11 was 15.08%; similarly for the three consecutive years market return were i.e. for 2011/12, 2012/13 and 2013/14 were 23.46%, 14.22% and 26.36% respectively. The average return for the five year comes to 20.52%. The Dividend given by the company during the financial year 2009/10 was 10; for 2010/11 dividends gives by the company was 12. The next year i.e. in 2011/12 dividend given by the company was 14. For the year 2012/13 the dividend given by the company was 16. And in 2013/14 the dividend declared by the company was 18. The average dividend for the five 14 the expected future dividend is 20.85. The Beta for the security is 1.15; risk free rate assumed 8%; market return calculated the figure is 8.81%. According to CAPM the expected return (R) comes Rs.8.93.Capital appreciation for the year 2010/11 was 47.28 that to in the year 2011/12 was-14.29, for 2012/13 and 2013/14 was 4.64 & 1.78% respectively. The expected trade of Rs. 266.25.and the expected future return is 500.78. The average value of security for the five financial years are calculated by taking average of 52week high and low and taking EPS value for same financial year. The P/E ratios are calculated by dividing average market price by EPS. The P/E ratio for 2009/10 was 50.57 that to for the year 2010/11 were 62.06 and for the year 2011/12 P/E ratio was 82.54, 2012/13 was 102.67 & 2013/14 was 110.68. The average P/E ratio was 3.02 which are used for valuation of security for 2014/15 i.e. 418.20.The market price of the share in July 14 is Rs.403.

3.6 YES BANK

Monthly high, Low & return of the stock YES BANK; are given below Months2009/10HighLowReturn (%)Months2010/11HighLowReturn (%)

April87.5549.776.16April297.4244.0025.89

May 144.273.895.39May 290.4253.314.64

June 155.4115.0035.13June 299.5263.0013.88

July 165.8124.1533.55July 304.7265.114.94

August 175.9145.0021.31August 344.4296.516.16


October 261.7184.0042.23October 380.00341.0511.42



January 287.9232.124.04January 317.7246.9528.65


March 260.3236.510.06March 326.00254.0028.35



April341.3302.538.8April380.5345.5510.11

May 308.4272.513.17May 352.95294.2519.95

June 316.95274.0016.68June 353.00310.713.61

July 340.00306.810.82July 365.95337.858.32

August 319.8252.5526.63August 373.9326.3514.57


October 324.00240.534.72October 421.00378.0011.38



January 332.5230.5544.22January 535.00466.0014.81


March 389.4331.0017.64March 500.75417.120.06


ContinuedMonths2013/14HighLowReturn (%)

April509.00417.1522.02

May 547.15486.0012.58

June 514.7438.5517.36

July 502.00288.5573.97

August 339.05216.156.89

September 394.7224.0076.21

October 382.2280.436.31

November 386.35323.2519.52

December 415.00358.1515.87

January 381.75304.0025.58

February 302.00292.13.39

March 407.8301.735.17

Average32.91

CALCULATIONS OF YES BANKReturn on security =High-Low/Low*100Average return on security = Total of Average / Number of years

YearAverage

2009/1035.21

2010/1120.78

2011/1223.6

2012/1313.81

2013/1432.91

Total126.31

= 126.31/5 =26.26%


2009/10--

2010/111.5-

2011/122.566

2012/13460

2013/14650

Total14176

Average Dividend (Rs) = Total of dividend/ Number of years =14/5 = 3.5 Expected Dividend (%) = 66+60+50 /3 = 176/3 =58.66 % i.e. 3.5 Average growth in Dividend (Rs.) = 9.5 (6+3.5)



2009/1035.2125.269.9512.708.813.8938.71

2010/1120.7825.26-4.487.798.81-1.024.57

2011/1223.625.26-1.669.948.811.13-1.88

2012/1313.8125.26-11.456.038.81-2.7831.83

2013/1432.9125.267.657.598.81-1.22-9.33

Total63.9

Covariance = Total of D1*D2 / Number of years =12.78Standard Deviation OF SECURITY (S.D.):- YearDeviation(D1) D1 square Deviation(D2) D2 square

2009/109.9599.003.8915.13

2010/11-4.4820.07-1.021.04

2011/12-1.662.761.131.28

2012/13-11.45131.10-2.787.73

2013/147.6558.52-1.221.49






Calculation for the Average Value of Security Average Value of security= High value for the 52week + Low value for the52 week 2

Average Value of SecurityYearHigh LowHigh value + Low value/2 Average value of security

2009/10212.99166.99212.99+166.99/2189.99

2010/11328.00273.1328.09+273.1/2300.60

2011/12330.35273.47330.35+273.47/2301.91

2012/13427.79376.35427.79+376.35/2402.07

2013/14423.48327.50423.48+327.50/2375.49


YearAverage value of security Opening Value Closing Value CA= CV -OV -----------*100 OVCA (%)

2009/10189.99189.99---

2010/11300.60300.60189.99110.61/189.99*10058

2011/12301.91301.91300.601.31/300.60*1000.43

2012/13402.07402.07301.91100.16/301.91*10033

2013/14375.49375.49402.07-26.58/402.07*100-7

Total 84.43

Average Capital Appreciation = 58 + 0.43 + 33 - 7/4 = 21.11% Expected value 2014/15 = 375.49 + 375.49*21.11% = 375.49 + 79.27 = 454.76 Expected Market Price of security on 2014/15(Rs.) =CA +Expected dividend/CAPM return *100/1 = 79.27+9.5/9.94*100/1 = 88.77/9.94*100/1 = 893


2009/1010.23189.9918.57

2010/1114.06300.6021.38

2011/1220.95301.9114.41

2012/1327.68402.0714.53

2013/1436.27372.4910.35

Average P/E Ratio = 18.57 + 21.38 + 14.41+ 14.53 + 10.35 /5= 79.24/5 = 15.84CALCULATION OF EPS - YearEPSEPS Raised (%)

2009/1010.23-

2010/1114.0637

2011/1220.9549

2012/1327.6832

2013/1436.2731

Total 149

Expected Future EPS = 37 + 49 +32 + 31 /4 = 37 % i.e. 13.41Expected future EPS = 36.27 + 13.41 = 49.68 Expected Market Price of security = P/E Ratio * EPS = 49.68*15.84 = 786.93

DATA INTERPRETATION OF YES BANK The average market return for the financial year 2009/10 found out to be 35.21% that of 2010/11 was 20.78%; similarly for the three consecutive years market return were i.e. for 2011/12, 2012/13 and 2013/14 were 23.6%, 13.81% and 32.91% respectively. The average return for the five year comes to 25.26%. The Dividend given by the company during the financial year 2009/10 was not declared; for 2010/11 dividends gives by the company was 1.5. The next year i.e. in 2011/12 dividend given by the company was 2.5. For the year 2012/13 the dividend given by the company was 4. And in 2013/14 the dividend declared by the company was 6. The average dividend for the five 9.66% the expected future dividend is 3.5. The Beta for the security is 2.40; risk free rate assumed 8%; market return calculated the figure is 8.81%. According to CAPM the expected return (R) comes Rs.9.94.Capital appreciation for the year 2010/11 was 58 that to in the year 2011/12 was 0.43, for 2012/13 and 2013/14 was 33 & 7% respectively. The expected trade of Rs.454.76 .and the expected future return is 893. The average value of security for the five financial years are calculated by taking average of 52week high and low and taking EPS value for same financial year. The P/E ratios are calculated by dividing average market price by EPS. The P/E ratio for 2009/10 was 18.57 that to for the year 2010/11 were 21.38 and for the year 2011/12 P/E ratio was 14.41, 2012/13 was 14.53 & 2013/14 was 10.35. The average P/E ratio was 15.84 which are used for valuation of security for 2014/15 i.e. 786.93.The market price of the share in July 14 is Rs.547.8.

5.1 FINDINGSA. The average market return for the study period (April- march 2014) was 8.81%.

B. According to CAPM, the expected return for the stock of HDFC Bank was 8.67%.

C. ICICI bank expected return was 8.69%.

D. The expected return for AXIS Bank was 8.83%.

E. The expected return for YES Bank was 9.94%.

F. The valuations of stocks are done with the help of P/E ratio (Price earning) formula as well as CAPM Value.

1. The HDFC BANK Expected value as per P/E ratio will 397.01 and CAPM value will be 1654.

2. The ICICI BANK Expected value as per P/E ratio will 363 and CAPM value will be 469.39.

3. The AXIS BANK Expected value as per P/E ratio will 418.20 and CAPM value will be 500.78.

4. The YES BANK Expected value as per P/E ratio will 786.93 and CAPM value will be 893.

5.2 SUGGESTIONS

An Investor can make the decision regarding the Buy or Sell of the Security depending upon the information given below:-

1. The HDFC BANK minimum estimated price of security is 397.01 so decision is buying security and the maximum estimated price of security is 1654 so decision is sell the security

2. The ICICI BANK minimum estimated price of security is 363 so decision is buying the security and the maximum estimated price of security is 469.39 so decision is sell the security.

3. The AXIS BANK minimum estimated price of security is 418.20 so decision is buying security and the maximum estimated price of security is 500.78 so decision is sell the security 4. The YES BANK minimum estimated price of security is 786.93 so decision is buying security and the maximum estimated price of security is 893 so decision is sell the security.

5. If the values of securities lie below the minimum estimated price then the investor should definitely buy the security and if value of security crosses the maximum estimated price then investor should sell the security to book the profit.

6. Above suggestions are for the year2014/15. Investor can make use of these calculations for the next year.

5.3 CONCLUSION: After completing study in HDFC BANK ,ICICI BANK , AXIS BANK & YES BANK on topic Application of CAPM , the researcher came to know that, CAPM value is the better than the P/E ratio Value for Investing in shares, so the Investor can invest with the help of CAPM value.

[Type text]Page 1AGIMS, SANGLIPage 4

project on capm

Documents

capm model

cost of equity capital

validity of capm

required rate of return

hdfc bank

axis bank

icici bank

use of market