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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
INTRODUCTION
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
I. INTRODUCTION
India is one of the fastest developing country in the world with the tenth-largest nominal
GDP and the third-largest purchasing power parity (PPP). Efficient transfer of resources
from those having idle resources to others who have a pressing need for them is achieved
through financial markets. Stated formally, financial markets provide channels for
allocation of savings to investment. The savers and investors are constrained not by their
individual abilities, but by the economy’s ability, to invest and save respectively [5]. An
investment is a monetary asset purchased with the idea that the asset will provide income
in the future or appreciate and be sold at a higher price and it is a commitment of funds
made in expectation of some positive rate of return. The investment process consists of
two tasks; first one is security analysis which focuses on assessing the risk and return
characteristics of the available investment vehicles. The second task is portfolio selection,
which involves choosing the best possible portfolio from the set of feasible portfolios [5].
A portfolio is a bundle or a combination of individual assets or securities. The portfolio
theory provides a normative approach to investors to make decisions to invest their
wealth in assets or securities under risk. It is based on the assumption that investors are
risk-averse. This implies that investors hold well diversified portfolio instead of investing
their entire wealth in a single or a few assets [5] [8]. One important conclusion of the
portfolio theory is that, if the investor of the portfolio theory holds a well diversified
portfolio of assets, then their concerns may be the expected rate of return and risk of the
portfolio, rather than individual assets and the contribution of individual asset to the
portfolio risk. The second assumption of the portfolio theory is that the returns of assets
are normally distributed. This means that the mean and variance analysis is the
foundation of the portfolio decisions [5].
The Capital Assets Pricing Model (CAPM), is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an already
well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into
account the asset's sensitivity to non-diversifiable risk represented by the
quantity beta (β). CAPM describes the relationship between risk and expected return and
is used in the pricing of risky securities. This relationship was first proposed
independently by John Lintner, William F. Sharpe and Mossin, by building on the earlier
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
work of Harry Markowitz on diversification and modern portfolio theory. The CAPM
introduced that the expected return of a security or a portfolio equals the rate of return on
a risk-free rate plus a risk premium. This model offers a simple tool for investors to
evaluate their investments. If this expected return does not meet or beat the required
return, then the investment should not be undertaken [5].
II. PROBLEM STATEMENT
Earning maximum returns on investments is definitely the motto for any investor.
Selecting stocks exclusively on the basis of maximization of return is not the only criteria.
The fact that most investors do not place their available funds in few stocks promising
higher returns suggests that other factors must be considered besides returns in selection
process. Investors want to maximize expected return subject to their assessment and
capacity to take risk. The risk associated with the holdings is that the return that is
achieved will be less than the return that was expected. Hence, the study of risk vis-à-vis
returns always holds a great significance, which immensely helps, in key decision-making
process.
Investors thus need to make decisions as to what securities should be held. Estimates
need to be prepared of the return and risk associated with the securities for a certain
period of time. This is known as security analysis and is built around the idea that
investors are concerned with expected return and risk, the two principal properties
inherent in securities.
Thus the return and risk and their measurement using Capital Asset Pricing Model
(CAPM) will be the core of the study undertaken. The attachment of the paramount
importance of these two principal properties, return and risk, inherent in securities with
the analysis of any investment decision makes the study significant.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
III. OBJECTIVES OF THE STUDY
1. To study the performance of SENSEX and the stocks on BSE SENSEX with
regard to risk and return.
2. To apply the regression model and calculate the alpha, beta, residual values and
the returns (Ri) of the selected stocks.
3. To calculate expected rate of returns (E(Ri)) of the securities using CAPM model.
4. To identify the underpriced/overpriced securities using CAPM model.
IV. SCOPE OF THE STUDY
The study attempts to understand whether the Capital Asset Pricing Model
(CAPM) shows high degree of relevance in Indian stock market or not.
V. METHODOLOGY
Research Design: This study is to analyze the performance of BSE SENSEX with
regard to risk and return, and to identify the underpriced/overpriced securities using
CAPM model.
STEP: 1
Selection of Companies: The economy was classified into different segments in order
to have the clear picture of an Indian economy BSE Sensex listed companies are
considered for this study.
AXIS BANK LARSEN & TOUBRO
BAJAJ AUTO MAHINDRA AND MAHINDRA
BHARAT HEAVY ELECTRICALS MARUTI SUZUKI
BHARATI AIRTEL NTPC
CIPLA OIL AND NATURAL GAS CORPORATION
COAL INDIA RELIANCE INDUSTRIES
GAIL SESA STERLITE LTD.
HERO MOTOCORP STATE BANK OF INDIA
HINDALCO INDUSTRIES SUN PHARMACEUTCAL
HINDUSTAN UNILEVER TATA CONSULTANCY SERVICES
HOUSING DEVELOPMENT FINANCE TATA MOTORS
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CORPORATION
ICICI BANK TATA POWER
INFOSYS TATA STEEL
ITC WIPRO
HDFC BANK DR.REDDYS LABORATORIES
STEP: 2
Daily share price (01-April-2011 to 31- March- 2014) was collected from the website of
Bombay stock exchange (www.bseindia.com).
STEP: 3
The Daily return (in percentage terms) of the stock and the index is calculated using
MS-EXCEL.
R= LOGe ( Rt / Rt-1 ) * 100
Where , Rt = Current Price of the share
Rt-1= Previous Price of the share
STEP: 4
To find Alpha, Beta and Residual Value of the stock is calculated using MS-EXCEL
through Regression Analysis. Beta is the only measure in the CAPM concept.
STEP: 5
Return and Expected return calculation needs the risk free rate, so we have taken risk free
rate at 8%.
STEP: 6
Return
Ri=+ Rm+e
Expected Return
E[Ri] = Rf + (Rm – Rf)
STEP: 7
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Where, Rm = Market Return
Rf = Risk Free Rate
= Beta Value
= Alpha Value
e = Residual Value
CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
The Return and Expected returns are compared to find whether the equities are priced
appropriately or not. If the actual price is more than the expected price then the equity is
underpriced. If the actual price is less than the expected price then the equity is
overpriced. If both prices are equal then the equity is priced appropriately.
STEP: 8
H0: Slope of BETA is not significantly different from Zero
H1: Slope of BETA is significantly different from Zero
Hypothesis testing (Z-test) is conducted using MS- EXCEL, to check whether the slope of
Beta varies significantly from Zero or not, with the help of values of Beta () and
Expected return (E(Ri)). Variance is also calculated for Beta and Expected return values
which is used in Z-test. Mean difference is kept at Zero.
VI. LIMITATIONS
As we consider Beta only, the bonus shares issued is not considered.
The dividends issued on the shares are also not taken into account, since the effect
on the return on the share would be minimal.
Since the study concentrates on data from 1st April 2011 the effect if the change in
SENSEX values would not have an impact on the study.
Since the returns the calculated on month wise the Risk free Rate (RF) was
assumed as 8%, which would not give us a realistic picture for the expected
return.
Since it is an academic exercise it may not have totally practical study.
Unfortunately procedure is not very practical since information on investor
expectation is very sketchy.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CHAPTER- 1
LITERATURE REVIEW
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
1.0 LITERATURE REVIEW
A study on “Testing the capital asset pricing model (CAPM) – A study of Indian stock
market” by Dr. G. Sudarsana Reddy (2011) is aimed at examining the validity of the
Capital Asset pricing Model in the Indian Stock Market. The study examines historical
monthly average stock prices of 80 companies and historical monthly average values of
market index of BSE 100 for the period June 2000 to May 2007, and the data collected
from NSE and BSE websites. Data analyzed in three steps: one, calculation of beta, alpha
and expected return, two, calculation of relationship between risk and return of the
selected Securities by using Spearmen’s correlation coefficient, and third, testing
hypothesis using Z-test. From the study we can say that there is significant relationship
between risk and return, investors have realized higher return by opting for higher risky
securities, and the validity of CAPM coefficients signifies the implication of the CAPM
in the Indian stock market in determining the required rate of return of risky securities [1].
In the year 2010 Kapil Choudhary and Sakshi Choudhary did study on “Testing Capital
Asset Pricing Model: Empirical Evidences From Indian Equity Market” which examines
the Capital Asset Pricing Model (CAPM) for the Indian stock market using monthly stock
returns from 278 companies of BSE 500 Index listed on the Bombay stock exchange for
the period of January 1996 to December 2009. The findings of this study are not
substantiating the theory’s basic result that higher risk (beta) is associated with higher
levels of return. The model does explain, however, excess returns and thus lends support
to the linear structure of the CAPM equation. The theory’s prediction for the intercept is
that it should equal zero and the slope should equal the excess returns on the market
portfolio. The results of the study lead to negate the above hypotheses and offer evidence
against the CAPM. The tests conducted to examine the nonlinearity of the relationship
between return and betas bolster the hypothesis that the expected return-beta relationship
is linear. Additionally, this study investigates whether the CAPM adequately captures all-
important determinants of returns including the residual variance of stocks. The results
exhibit that residual risk has no effect on the expected returns of portfolios [2].
A research study did by Sylvester Jarlee (2007) “A Test of the Capital Asset Pricing
Model: Studying Stocks on the Stockholm Stock Exchange”, is to study if the CAPM
holds on the Stockholm Stock Exchange, meaning: If higher beta yields higher expected
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
return, If the intercept equals zero/average risk-free rate and slope of SML equals the
average risk premium and If there exist linearity between the stock beta and the expected
return. For this research, monthly stock returns for twenty (28) firms listed on the
Stockholm Stock Exchange are used. The data ranges from January 2001 to December
2006, a period of six years. To test the CAPM in this paper, Author used approach
methods as described by Black, Jensen and Scholes (1972) time-series test as well as
Fama and MacBeth (1973) cross-sectional test [3].
According to a study conducted by Peter Bossaerts, Daniel Kleiman and Charles Plott
(2009) “Price Discovery In Financial Markets: The Case Of The CAPM” explains about
the report on experiments of simple, repeated asset markets in two risky securities and
one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which
embeds the two most essential principles of modern asset pricing theory, namely,(i)
financial markets equilibrate, (ii) in equilibrium, risk premium are solely determined by
covariance with aggregate risk. Slow, but steady convergence towards the CAPM is
discovered. The convergence process, however, halts before reaching the actual
equilibrium. There is ample evidence that subjects gradually move up in mean-variance
space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading
time was insufficient to complete all the transactions that are needed to guarantee
improvements in positions. We conjecture that this is due to subjects’ hesitance in the
face of market thinness. Because the convergence process halts, statistical tests reject the
CAPM [4].
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CHAPTER-2
INDUSTRY ANALYSIS
2.0 INDUSTRY ANALYSIS
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Efficient transfer of resources from those having idle resources to others who have a
pressing need for them is achieved through financial markets. Stated formally, financial
markets provide channels for allocation of savings to investment. The savers and
investors are constrained not by their individual abilities, but by the economy’s ability, to
invest and save respectively [5]. The financial markets, thus, contribute to economic
development to the extent that the latter depends on the rates of savings and investment.
The financial markets have two major components: Money market and Capital Market.
The Money market is "a market for short term funds with maturity ranging from
overnight to one year and includes financial instruments that are deemed to be close
substitutes of money". It is diversified and has evolved through many stages, from the
conventional platform of Treasury Bills and Call Money to Commercial paper,
Certificates of Deposit, and Repos. The Indian money market consists of the unorganized
sector: moneylenders, indigenous bankers, chit funds; organized sector: Reserve Bank of
India, private banks, public sector banks, development banks and other Non Banking
Financial Companies(NBFCs) such as Life Insurance Corporation of India (LIC), Unit
Trust of India (UTI), the International Finance Corporation, IDBI, and the co-operative
sector[5].
The Capital markets are financial markets for the buying and selling of long-term debt-
or equity-backed securities. These markets channel the wealth of savers to those who can
put it to long-term productive use, such as companies or governments making long-term
investments in the form of Equities, Bonds, Debentures, Fixed Deposits, Provident Funds,
Insurances, Commodities, and Mutual Funds. The capital market attracts people who are
risk oriented. While investing in to capital market one should be careful to judge the
valuation of the stock and understand the complexities involved in the stock price
fluctuations [5].
2.1 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulator for
the securities market in India. It was established in the year 1988 and given statutory
powers on 12 April 1992 through the SEBI Act, 1992. It was officially established by
The Government of India in the year 1988 and given statutory powers in 1992 with
SEBI Act 1992 being passed by the Indian Parliament. SEBI has its Headquarters at the
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
business district of Bandra Kurla Complex in Mumbai, and has Northern, Eastern,
Southern and Western Regional Offices in New Delhi, Kolkata, Chennai, and Ahmedabad
respectively. Controller of Capital Issues was the regulatory authority before SEBI came
into existence; it derived authority from the Capital Issues (Control) Act, 1947. Initially
SEBI was a non statutory body without any statutory power. However in the year of
1995, the SEBI was given additional statutory power by the Government of India through
an amendment to the Securities and Exchange Board of India Act, 1992. In April, 1988
the SEBI was constituted as the regulator of capital markets in India under a resolution of
the Government of India. The SEBI is managed by its members, which consists of
following:
a) The chairman who is nominated by Union Government of India.
b) Two members, i.e. Officers from Union Finance Ministry.
c) One member from The Reserve Bank of India.
d) The remaining 5 members are nominated by Union Government of India; out of
them at least 3 shall be whole-time members [5].
2.1.2 FUNCTIONS AND RESPONSIBILITIES
The Preamble of the Securities and Exchange Board of India describes the basic functions
of the Securities and Exchange Board of India as "to protect the interests of investors in
securities and to promote the development of, and to regulate the securities market and
for matters connected therewith or incidental thereto". SEBI has to be responsive to the
needs of three groups, which constitute the market: The issuer of Securities, The Investor,
and The Market Intermediaries.
The issuer of Securities
The Investor
The Market Intermediaries.
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-
executive. It drafts regulations in its legislative capacity, it conducts investigation and
enforcement action in its executive function and it passes rulings and orders in its judicial
capacity. Though this makes it very powerful, there is an appeal process to create
accountability. There is a Securities Appellate Tribunal which is a three-member tribunal
and is presently headed by Mr. Justice J P Devadhar, a former judge of the Bombay High
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Court; a second appeal lies directly to the Supreme Court. SEBI has taken a very
proactive role in streamlining disclosure requirements to international standards [5].
2.13 POWERS
For the discharge of its functions efficiently, SEBI has been vested with the following
powers:
1. To approve by−laws of stock exchanges.
2. To require the stock exchange to amend their by−laws.
3. Inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
4. Inspect the books of accounts of financial intermediaries.
5. Compel certain companies to list their shares in one or more stock exchanges.
6. Registration brokers.
There are two types of brokers.
Circuit broker
Merchant broker [5].
2.1.4 MAJOR ACHIEVEMENTS
SEBI has enjoyed success as a regulator by pushing systematic reforms aggressively and
successively. SEBI is credited for quick movement towards making the markets
electronic and paperless by introducing T+5 rolling cycle from July 2001 and T+3 in
April 2002 and further to T+2 in April 2003. The rolling cycle of T+2
means, Settlement is done in 2 days after Trade date. SEBI has been active in setting up
the regulations as required under law. SEBI did away with physical certificates that were
prone to postal delays, theft and forgery, apart from making the settlement process slow
and cumbersome by passing Depositories Act, 1996.
SEBI has also been instrumental in taking quick and effective steps in light of the global
meltdown and the Satyam fiasco. In October 2011, it increased the extent and quantity of
disclosures to be made by Indian corporate promoters. In light of the global meltdown, it
liberalised the takeover code to facilitate investments by removing regulatory structures.
In one such move, SEBI has increased the application limit for retail investors to ₹2 lakh,
from ₹1 lakh at present [5].
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2.2 INDIAN STOCK MARKETS
The stock markets are of two types – the primary market and the secondary market. This
is true for the Indian stock markets as well. Basically the primary market is the place
where the shares are issued for the first time. So when a company is getting listed for the
first time at the stock exchange and issuing shares – this process is undertaken at the
primary market. That means the process of the Initial Public Offering or IPO and the
debentures are controlled at the primary stock market. On the other hand the secondary
market is the stock market where existing stocks are bought and sold by the retail
investors through the brokers. It is the secondary market that controls the price of the
stocks. Generally when we speak about investing or trading at the stock market we mean
trading at the secondary stock market. It is the secondary market where we can invest and
trade in the stocks to get the profit from our stock market investment.
Now these are the broadest classification of the stock markets that is true for any country
as well as India. But the Indian stock markets can be divided into further categories
depending on various aspects like the mode of operation and the diversification in
services. First of the two largest stock exchanges in India can be divided on the basis of
operation. While the Bombay stock exchange (BSE) is a conventional stock exchange
with a trading floor and operating through mostly offline trades, the National Stock
Exchange or NSE is a completely online stock exchange and the first of its kind in the
country. The trading is carried out at the National Stock Exchange through the electronic
limit order book or the LOB. With the immense popularity of the process and online
trading facility other exchanges started to take up the online route including the BSE
where you can trade online as well. But the BSE is still having the offline trading facility
that is carried out at the trading floor of the exchange at its Dalal Street facility.
Apart from these classifications there are also different types of stock market in India and
the classification is made on the type of instrument that is being traded at the market.
Both the Bombay Stock Exchange and the National Stock Exchange have these types of
stock markets.
Equity market or the cash segment – The first type of market is the equity market or the
cash segment where stocks are traded. In this type of trading the buyers of the stocks
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
book a buying order with a bid price and the order is executed through the broker at a
negotiated ask price offered by the sellers at the market. In most cases the deal is closed
or the stocks are brought at the best available ask price. In this type of trading the buyer
pays the entire amount of the value of the stocks that is determined by multiplying the
number stocks with the current price of the stock. Once the buyer pays the entire amount
along with the brokerage and taxes of the transaction the stocks are deposited to the DP
account of the buyer. This chapter analyze the performance of BSE SENSEX with regard
to risk and return, and to identify the underpriced/overpriced securities using CAPM
model; furthermore, brief interpretations are followed at each section [6].
2.3 S&P BSE SENSEX
Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is
Asia’s first & fastest Stock Exchange with the speed of 200 micro second and one of
India’s leading exchange groups. Over the past 139 years, BSE has facilitated the growth
of the Indian corporate sector by providing it an efficient capital-raising platform. BSE
provides an efficient and transparent market for trading in equity, debt instruments,
derivatives, mutual funds. It also has a platform for trading in equities of small-and-
medium enterprises (SME).
More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms
of listed members. The companies listed on BSE Ltd command a total market
capitalization of USD 1.24 Trillion as of March 2014. It is also one of the world’s leading
exchanges (3rd largest in March 2014) for Index options trading [5].
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of
BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major
stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE
National Index was renamed BSE-100 Index from 14 October 1996 and since then, it is
being calculated taking into consideration only the prices of stocks listed at BSE. BSE
launched the dollar-linked version of BSE-100 index on 22 May 2006. BSE launched two
new index series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500
Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU
Index, DOLLEX-30 and the country's first free-float based index - the BSE Tech Index.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Over the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU
index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book
Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major
indices. The values of all BSE indices are updated on real time basis during market hours
and displayed through the BOLT system, BSE website and news wire agencies. All BSE
Indices are reviewed periodically by the BSE Index Committee. This Committee which
comprises eminent independent finance professionals frames the broad policy guidelines
for the development and maintenance of all BSE indices. The BSE Index Cell carries out
the day-to-day maintenance of all indices and conducts research on development of new
indices. Popularly known as BSE. SENSEX is significantly correlated with the stock
indices of other emerging markets [5].
Figure 2.1 Returns on S&P BSE SENSEX
S&P BSE SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-
Weighted" methodology of 30 component stocks representing large, well-established and
financially sound companies across key sectors. The base year of S&P BSE SENSEX was
taken as 1978-79. S&P BSE SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically
designed and is based on globally accepted construction and review methodology. Since
September 1, 2003, S&P BSE SENSEX is being calculated on a free-float market
capitalization methodology. The "free-float market capitalization-weighted" methodology
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
is a widely followed index construction methodology on which majority of global equity
indices are based; all major index providers like MSCI, FTSE, STOXX, and Dow Jones
use the free-float methodology.
The growth of the equity market in India has been phenomenal in the present decade.
Right from early nineties, the stock market witnessed heightened activity in terms of
various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy
in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. S&P
BSE SENSEX has captured all these happenings in the most judicious manner. One can
identify the booms and busts of the Indian equity market through S&P BSE SENSEX. As
the oldest index in the country, it provides the time series data over a long period of time
(from 1979 onwards). Small wonder, the S&P BSE SENSEX has become one of the most
prominent brands in the country. For the analysis of the performance of CAPM, BSE
SENSEX stocks are taken which are explained below, as performance of the select 30
stocks gives the exact overview of an Indian equity market as well as Indian economy [5].
2.3.1 AXIS BANK LIMITED
Axis Bank Limited (formerly UTI Bank) is the third largest private sector bank in India. It
offers financial services to customer segments covering Large and Mid-Corporates,
MSME, Agriculture and Retail Businesses. Axis Bank (erstwhile UTI Bank) opened its
registered office in Ahmedabad and corporate office in Mumbai in December 1993. Axis
Bank began its operations in 1994, after the Government of India allowed new private
banks to be established. The Bank was promoted in 1993 jointly by the Administrator of
the Unit Trust of India (UTI-I), Life Insurance Corporation of India(LIC), General
Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance
Company, The Oriental Insurance Corporation and United India Insurance Company. The
Unit Trust of India holds a special position in the Indian capital markets and has
promoted many leading financial institutions in the country. As of 2012, Axis Bank
Revenue is ₹340 billion (US$5.8 billion), Operating income is ₹94
billion (US$1.6 billion) , Net income is ₹52 billion (US$880 million) and Total assets are
₹3.4 trillion (US$58 billion)[5].
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
2.3.2 CIPLA LIMITED
Cipla Limited is a pharmaceutical company based in Mumbai, India. Cipla makes drugs
to treat cardiovascular disease, arthritis, diabetes, weight control, depression and many
other health conditions. On 31 March 2013, its market capitalisation was INR 305 billion
(US$ 5.6 billion), making it India's 41st largest publicly traded company by market value.
It was founded by Dr. Khwaja Abdul Hamied as 'The Chemical, Industrial &
Pharmaceutical Laboratories' in 1935 in Mumbai. The name of the Company was
changed to 'Cipla Limited' with effect from 20 July 1984, wherein the word Cipla came
from the first letters of each word in the old name 'The Chemical, Industrial
& Pharmaceutical Laboratories'. In the year 1985, US FDA approved the company's bulk
drug manufacturing facilities. In 1994, Cipla launched Deferiprone, the world’s first oral
iron chelator. In 2001, Cipla offered medicines (antiretrovirals) for HIV treatment at a
fractional cost (less than $350 per year per patient). In 2012, the company slashed prices
of three life-saving cancer drugs by 50-64%. In 2013, it increased its stake in its South
African joint venture CIPLA Medpro from 50% to 100% stake for INR 27 billion to
strengthen its position in the African continent. Cipla Medpro is the third largest South
African pharmaceutical company and it was founded in 1993. As of year ending 2012-
13 , CIPLA ltd. Revenue is ₹85.01 billion (US$1.4 billion) , Total equity are ₹90.19
billion (US$1.5 billion), Net income is ₹20.95 billion (US$360 million) and Total assets
are ₹116.58 billion (US$2.0 billion)[5].
2.4.3 BHARAT HEAVY ELECTRICALS LIMITED (BHEL)
BHEL owned by Government of India, is a power plant equipment manufacturer and
operates as engineering and manufacturing company based in New Delhi, India. BHEL
was established in 1964. Heavy Electrical (India) Ltd was merged with BHEL in
1974. The company has been earning profits continuously since 1971-72 and paying
dividends since 1976-77In 1982, it entered into power equipments, to reduce its
dependence on the power sector. It developed the capability to produce a variety of
electrical, electronic and mechanical equipments for all sectors, including transmission,
transportation, oil and gas and other allied industries. In 1991, it was converted into a
public limited company. By the end of 1996, the company had handed over 100 Electric
Locomotives to Indian Railway and installed 250 Hydro-sets across India. As of June
2011, it had cumulatively installed generating capacity of over 8,500 MW outside of
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
India in 21 countries, including Malaysia, Iraq, UAE, Egypt and New Zealand. As of year
ending 2012-13, Revenue is ₹50,156 Crores (US$ 9.23 billion), Total equity are ₹30,533
Crores (US$ 5.62 billion) Net income is 6,615 Crores (US$ 1.22 billion) and Total assets
are ₹71,753 Crores (US$ 13.21 billion)[5].
2.3.4 STATE BANK OF INDIA (SBI)
SBI is a multinational banking and financial services company based in India. It is
a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of
December 2013, it had assets of US$388 billion and 17,000 branches, including 190
foreign offices, making it the largest banking and financial services company in India by
assets. The roots of the State Bank of India lie in the first decade of the 18th century,
when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June
1806. The Bank of Bengal was one of three Presidency banks, the other two being
the Bank of Bombay (incorporated on 15 April 1840) and the Bank of
Madras (incorporated on 1 July 1843). Pursuant to the provisions of the State Bank of
India Act of 1955, the Reserve Bank of India, which is India's central bank, acquired a
controlling interest in the Imperial Bank of India. On 1 July 1955, the Imperial Bank of
India became the State Bank of India. In 2008, the government of India acquired the
Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the
RBI is the country's banking regulatory authority. In 1959, the government passed the
State Bank of India (Subsidiary Banks) Act, which made eight state banks associates of
SBI. A process of consolidation began on 13 September 2008, when the State Bank of
Saurashtra merged with SBI. SBI has acquired local banks in rescues. The first was the
Bank of Behar (est. 1911), which SBI acquired in 1969, together with its 28 branches.
The next year SBI acquired National Bank of Lahore (est. 1942), which had 24 branches.
Five years later, in 1975, SBI acquired Krishnaram Baldeo Bank.. In 1985, SBI acquired
the Bank of Cochin in Kerala. SBI was the acquirer as its affiliate, the State Bank of
Travancore, already had an extensive network in Kerala. SBI is a regional banking
behemoth and has 20% market share in deposits and loans among Indian commercial
banks [5].
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2.2.5 HDFC BANK LIMITED
HDFC Bank is an Indian financial services company based in Mumbai; it was
incorporated in August 1994. It was promoted by Housing Development Finance
Corporation Limited (HDFC), India's largest housing finance company. It was among the
first companies to receive an 'in principle' approval from the Reserve Bank of India
(RBI) to set up a bank in the private sector. The Bank started operations as
a scheduled commercial bank in January 1995 under the RBI's liberalization policies.
On 26 February 2000, Times Bank Limited owned by The Times Group (Bennett,
Coleman & Co.) was merged with HDFC Bank Ltd. This was the first merger of two
private banks in India. Shareholders of Times Bank received 1 share of HDFC Bank for
every 5.75 shares of Times Bank. On 23 May 2008, HDFC Bank acquired Centurion
Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank
emerged with a base of about ₹1,22,000 crore and net advances of about ₹89,000 crore.
The balance sheet size of the combined entity is more than ₹1,63,000 crore. . HDFC
Bank is the fifth largest bank in India by assets. It is the largest bank in India by market
capitalization as of 24 February 2014. As on Jan 2 2014, the market cap value of HDFC
was around USD 26.88B, as compared to Credit Suisse Group with USD 47.63B. The
bank was promoted by the Housing Development Finance Corporation, a premier housing
finance company (set up in 1977) of India. As of 31 March 2013, the bank had assets of
INR 4.08. For the fiscal year 2012-13, the bank has reported net profit of ₹69 billion, up
31% from the previous fiscal year. Its customer base stood at 28.7 million customers on
31 March 2013 [5].
2.3.6 OIL AND NATURAL GAS CORPORATION LIMITED (ONGC)
ONGC is an Indian multinational oil and gas company headquartered in Dehradun, India.
It is a Public Sector Undertaking (PSU) of the Government of India, under the
administrative control of the Ministry of Petroleum and Natural Gas. It is India's
largest oil and gas exploration and production company. It produces around 69% of
India's crude oil(equivalent to around 30% of the country's total demand) and around 62%
of its natural gas. On 31 March 2013, its market capitalisation was ₹2.6 trillion (US$
48.98 billion), making it India's second largest publicly traded company. In a government
survey for FY 2011-12, it was ranked as the largest profit making PSU in India. ONGC
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has been ranked 357th in the Fortune Global 500 list of the world's biggest corporations
for the year 2012. It is ranked 22nd among the Top 250 Global Energy Companies
by Platts. ONGC was founded on 14 August 1956 by Government of India, which
currently holds a 69.23% equity stake. It is involved in exploring for and exploiting
hydrocarbons in 26 sedimentary basins of India, and owns and operates over
11,000 kilometers of pipelines in the country. Its international subsidiary ONGC Videsh
currently has projects in 15 countries. ONGC has discovered 6 of the 7 commercially-
producing Indian Basins, in the last 50 years, adding over 7.1 billion tonnes of In-place
Oil & Gas volume of hydrocarbons in Indian basins. Against a global decline of
production from matured fields, ONGC has maintained production from its brownfields
like Mumbai High, with the help of aggressive investments in various IOR (Improved Oil
Recovery) and EOR (Enhanced Oil Recovery) schemes. ONGC has many matured fields
with a current recovery factor of 25-33%. Its Reserve Replacement Ratio for between
2005 and 2013 has been more than one. During FY 2012-13, ONGC had to share the
highest ever under-recovery of ₹494.2 million (an increase of ₹49.6 billion over the
previous financial year) towards the under-recoveries of Oil Marketing Companies
(IOC, BPCL and HPCL). As of year ending 2012, Revenue is US$ 27.6 billion, Operating
Income is US$ 5.4 billion , Profit is US$ 3.8 billion , Total equity worth of US$
25.74 billion and Total assets are US$ 43.01 billion [5].
2.3.7 HERO MOTOCORP LTD.
Hero Motocorp formerly Hero Honda, is an Indian motorcycle and scooter manufacturer
based in New Delhi, India. The company is the largest two wheeler manufacturer in the
world. In India, it has a market share of about 46% share in 2-wheeler category. On 31
March 2013, the market capitalisation of the company was ₹ 308 billion (USD 5.66
billion). Hero Honda started in 1984 as a joint venture between Hero Cycles of India
and Honda of Japan. In 2010, when Honda decided to move out of the joint venture, Hero
Group bought the shares held by Honda. Subsequently, in August 2011 the company was
renamed Hero MotoCorp with a new corporate identity. In June 2012, Hero
Motocorp approved a proposal to merge the investment arm of its parent Hero Investment
Pvt. Ltd. into the automaker. The decision comes after 18 months of its split from Honda
Motors. “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
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Company was established in 1984 as the Hero Honda Motors Limited at Dharuhera,
India. Munjal family and Honda group both owned 26% stake in the Company. As of
year ending 2012-13, Revenue is ₹241.66 billion (US$4.1 billion), Operating Income is
₹33.22 billion (US$560 million), Net income is ₹21.18 billion (US$360 million) and
Total assets are ₹53.08 billion (US$900 million) [5].
2.3.8 INFOSYS
Infosys (formerly Infosys Technologies) is an Indian multinational that provides business
consulting, technology, engineering and outsourcing services. It is headquartered
in Bangalore, Karnataka. Infosys is the third-largest India-based IT services company by
2012 revenues, and the second largest employer of H-1B visa professionals in the United
States, as of 2012. On 31 March 2014, its market capitalisation was $30.95 billion,
making it India's fifth largest publicly traded company.The company was incorporated as
"Infosys Consultants Pvt Ltd." with a capital of Rs 10000 (roughly $167) in Model
Colony, Pune as the registered office and signed its first client, Data Basics Corporation,
in New York. In 1983, the company's corporate headquarters was relocated to Bangalore.
As of year ending 2013-14, Revenue is US$ 8.4 billion, Operating Income is US$
1.98 billion, Profit is US$ 1.75 billion, Total equity is US$ 8.33 billion and Total assets
are US$ 9.53 billion[5].
2.3.9 RELIANCE INDUSTRIES LIMITED (RIL)
RIL is an Indian conglomerate company holding, headquartered in Mumbai Maharashtra,
India. The company operates in five major segments: exploration and production, refining
and marketing, petrochemicals, retail and telecommunications. RIL is the second-
largest publicly traded company in India by market capitalisation and is the second largest
company in India by revenue after the state-run Indian Oil Corporation. The company is
ranked No. 107 on the Fortune Global 500 list of the world's biggest corporations, as of
2013. RIL contributes approximately 14% of India's total exports. As of year ending
2013-14, Revenue is US$ 73.10 billion, Operating Income is US$ 7.14 billion, Net
Income is US$ 3.86 billion, Total equity is US$ 31.66 billion and Total assets are US$
58.67 billion[5].
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2.3.10 TATA POWER
Tata power is an Indian electric utility company based in Mumbai, Maharashtra, India
and is part of the Tata Group. The core business of the company is to generate, transmit
and distribute electricity. With an installed electricity generation capacity of about
8500 MW, it is India's largest private power producer. At the end of August 2013, its
market capitalisation was $2.74 billion (₹ 182 billion).The firm started as the Tata
Hydroelectric Power Supply Company in 1911, which amalgamated with the Andhra
Valley Power Supply Company in 1916. It commissioned India’s first large hydro-
electric project in 1915 in Khopoli for 72 MW. Then second and third power plants were
installed in Bhivpuri (78 MW) in 1919 and Bhira (300 MW) in 1922. As on year ending
2013, Revenue is ₹330254 million (US$5.6 billion), Operating Income is ₹64447 million
(US$1.1 billion) and Net Income is ₹12766 million (US$220 million) [5].
2.3.11 HINDALCO INDUSTRIES LTD.
Hindalco is an aluminium manufacturing company and is a subsidiary of the Aditya Birla
Group. Its headquarters is at Mumbai, Maharashtra, India. The company has annual sales
of US$ 15 billion and employs around 20,000 people. It is listed in the Forbes Global
2000 at 895th rank. Its market capitalisation by the end of May 2013 was US$ 3.4
billion. Hindalco is one of the world's largest aluminium rolling companies and one of the
biggest producers of primary aluminium in Asia. The Hindustan Aluminium Corporation
Limited was established in 1958 by the Aditya Birla Group. In 1962 the company began
production in Renukoot in Uttar Pradesh making 20 thousand metric tons per year of
aluminium metal and 40 thousand metric tons per year of alumina. In 1989 the company
was restructured and renamed Hindalco. As on year ending 2013, Revenue is ₹812.05
billion (US$14 billion), Net Income is ₹30.27 billion (US$510 million), an Total assets
are ₹1014.02 billion (US$17 billion) [5].
2.3.12 TATA STEEL LIMITED
Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is
an Indian multinational steel-making company headquartered in Mumbai, Maharashtra,
India, and a subsidiary of the Tata Group. It was the 12th largest steel producing company
in the world in 2012, with an annual crude steel capacity of 23.8 million tonnes, and the
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second largest private-sector steel company in India (measured by domestic production)
with an annual capacity of 9.7 million tonnes after SAIL.
Tata Steel has manufacturing operations in 26 countries, including Australia, China,
India, the Netherlands, Singapore, Thailand and the United Kingdom, and employs
around 80,500 people. Its largest plant is located in Jamshedpur, Jharkhand. In 2007 Tata
Steel acquired the UK-based steel maker Corus which was the largest international
acquisition by an Indian company till that date. It was ranked 471st in the 2013 Fortune
Global 500 ranking of the world's biggest corporations. It was the seventh most valuable
Indian brand of 2013 as per Brand Finance. On February 12, 2012 Tata Steel completed
100 years of steel making in India. TISCo is a worldwide steel industry founded in 1907
by Dorabji Tata. The company is situated in Mumbai. TISCo stands for Tata Iron and
Steel Company Limited. Tata Iron and Steel Company was established by Dorabji
Tata on August 25, 1907, as part of his father Jamsetji's Tata Group. By 1939 it operated
the largest steel plant in the British Empire. The company launched a major
modernization and expansion program in 1951. Later in 1958, the program was upgraded
to 2 Million metric tonnes per annum (MTPA) project. By 1970, the company employed
around 40,000 people at Jamshedpur, with a further 20,000 in the neighbouring coal
mines. In 1971 and 1979, there were unsuccessful attempts to nationalise the company. In
1990, it started expansion plan and established its subsidiary Tata Inc. in New York. The
company changed its name from TISCO to Tata Steel in 2005. As on year ending 2012,
Revenue is US$ 24.67 billion , Operating Income is US$ 1.48 billion, Profit is
US$ 1.00 billion , Total equity is US$ 8.19 billion and Total assets are
US$ 27.34 billion [5] .
2.3.13 LARSEN & TOUBRO LIMITED
L&T is an Indian multinational conglomerate headquartered in Mumbai, India. It was
founded by Danish engineers and funding. The company has business interests in
engineering, construction, manufacturing goods, information technology and financial
services, and also has an office in the Middle East and other parts of Asia. L&T is India's
largest engineering and construction company. Considered to be the "bellwether of India's
engineering & construction sector", L&T was recognized as the Company of the Year in
Economic Times 2010 awards. As on year ending 2012, Revenue is US$ 13.6 Billion,
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Operating Income is US$ 1.39774 Billion, Net Income is US$ 952.638 Million, Total
equity is US$ 6.6818 Billion and Total assets are US$ 27.34 billion [5].
2.2.14 MAHINDRA & MAHINDRA LIMITED (M&M)
M&M is an Indian multinational automobile manufacturing corporation headquartered in
Mumbai. It is one of the largest vehicle manufacturers by production in India and the
largest seller of tractors across the world. It is a part of Mahindra Group, an Indian
conglomerate. It was ranked as the 10th most trusted brand in India, by The Brand Trust
Report, India Study 2014. It was ranked 21st in the list of top companies of India
in Fortune India 500 in 2011. Its major competitors in the Indian market include Maruti
Suzuki, Tata Motors, Ashok Leyland, Toyota, Hyundai, Mercedes-Benz (Merc) and
others. Mahindra & Mahindra was set up as a steel trading company in 1945 in
Ludhiana as Mahindra & Mohammed by brothers K.C. Mahindra and J.C. Mahindra
and Malik Ghulam Mohammed. After India gained independence and Pakistan was
formed, Mohammed emigrated to Pakistan. The company changed its name to Mahindra
& Mahindra in 1948. It eventually saw business opportunity in expanding into
manufacturing and selling larger MUVs, starting with assembly under licence of
the Willys Jeep in India. Soon established as the Jeep manufacturers of India, the
company later commenced manufacturing light commercial vehicles (LCVs) and
agricultural tractors. Today, Mahindra & Mahindra is a key player in the utility vehicle
manufacturing and branding sectors in the Indian automobile industry with its
flagship UV Scorpio and uses India's growing global market presence in both the
automotive and farming industries to push its products in other countries. Over the past
few years, the company has taken interest in new industries and in foreign markets. They
entered the two-wheeler industry 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. In the 2010-11 M&M entered in micro drip irrigation with the
takeover of EPC Industries' Ltd, Nasik. As on year ending 2013, Revenue is 691₹
billion (US$12 billion), Net Income is 41 billion₹ (US$700 million) and Total assets are
712 billion₹ (US$12 billion) [5].
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2.2.15 TATA MOTORS LIMITED
Tata Motors Limited (formerly TELCO, short for Tata Engineering and Locomotive
Company) is an Indian multinational automotive manufacturing company headquartered
in Mumbai, Maharashtra, India and a subsidiary of the Tata Group. Its products include
passenger cars, trucks, vans, coaches, buses, construction equipment and military
vehicles. It is the world's seventeenth-largest motor vehicle manufacturing company,
fourth-largest truck manufacturer and second-largest bus manufacturer by volume.
Tata Motors' principal subsidiaries include the British premium car maker Jaguar Land
Rover (the maker of Jaguar, Land Rover and Range Rover cars) and the South Korean
commercial vehicle manufacturer Tata Daewoo. Tata Motors has a bus manufacturing
joint venture with Marco polo S.A. (Tata Marco polo), a construction equipment
manufacturing joint venture with Hitachi (Tata Hitachi Construction Machinery), and a
joint venture with Fiat which manufactures automotive components and Fiat and Tata
branded vehicles.
Founded in 1945 as a manufacturer of locomotives, the company manufactured its first
commercial vehicle in 1954 in collaboration with Daimler-Benz AG, which ended in
1969. Tata Motors entered the passenger vehicle market in 1991 with the launch of
the Tata Sierra, becoming the first Indian manufacturer to achieve the capability of
developing a competitive indigenous automobile. In 1998, Tata launched the first fully
indigenous Indian passenger car, the Indica, and in 2008 launched the Tata Nano, the
world's most affordable car. Tata Motors acquired the South Korean truck
manufacturer Daewoo Commercial Vehicles Company in 2004 and purchased Jaguar
Land Rover from Ford in 2008. As of the year ending 2012, Revenue US$ 32.23 billion,
Operating income US$ 3.06 billion, Total equity US$ 6.44 billion, Profits
US$ 2.28 billion, and Total assets US$ 28.05 billion[5].
2.3.16 HINDUSTAN UNILEVER LIMITED (HUL)
HUL is an Indian consumer goods company based in Mumbai, Maharashtra. It is owned
by Anglo-Dutch Company Unilever which owns a 67% controlling share in HUL. HUL's
products include foods, beverages, cleaning agents and personal care products.HUL was
established in 1933 as Lever Brothers India Limited and, in 1956, became known as
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Hindustan Lever Limited, as a result of a merger between Lever Brothers, Hindustan
Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India
and employs over 16,500 workers, whilst also indirectly helping to facilitate the
employment of over 65,000 people. The company was renamed in June 2007as
"Hindustan Unilever Limited”. Hindustan Unilever's distribution covers over 2 million
retail outlets across India directly and its products are available in over 6.4 million outlets
in the country. As per Nielsen market research data, two out of three Indians use HUL
products. As of year ending 2012 revenue is ₹221 billion (US$3.8 billion), Net income is
₹.26.91 billion (US$460 million) [5].
2.3.17 ITC LIMITED
ITC is an Indian conglomerate headquartered in Kolkata, West Bengal. Its diversified
business includes five segments: Fast Moving Consumer Goods (FMCG), Hotels,
Paperboards & Packaging, Agri Business & Information Technology. In 2012-13, the
company had an annual turnover of US$ 8.31 billion and a market capitalisation of US$
45 billion. It employs over 25,000 people at more than 60 locations across India and is
part of Forbes 2000 list.ITC claims that it is the only company in the world of comparable
dimensions to be Carbon Positive, Water Positive and Solid Waste Recycling Positive. As
of year ending 2013 Revenue is ₹.45,102 Crores (US$ 8.31 billion), Operating income is
₹.11,106 Crores (US$ 2.05 billion) , Net income is ₹. 7,608 Crores (US$ 1.40 billion),
Total assets are ₹. 35,353 Crores (US$ 6.51 billion) and Total equity are worth ₹.23,158
Crores (US$ 4.27 billion) [5].
2.3.18 COAL INDIA LIMITED (CIL)
CIL is an Indian state-controlled coal mining company headquartered in Kolkata, West
Bengal, India. It is the largest coal producer company in the world and contributes around
81% of the coal production in India. It produced 452 million tonnes of coal during FY
2012–13 and earned a revenue of ₹.882.81 billion from sale of coal in the same financial
year. Union Government of India owns 61% of the shares in CIL and controls the
operations of CIL through Ministry of Coal. In April 2011, CIL was conferred
the Maharatna status by the Union Government of India. On 31 March 2013, its market
capitalisation was ₹.1.952 trillion (US $35.9 billion) making it India's 5th most valuable
company by market value. As of year ending 2012, Revenue is ₹.770.49
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billion (US$13 billion), Operating income is ₹.249.72 billion (US$4.2 billion), Profit is
₹.173.56 billion (US$3.0 billion), Total assets are ₹.1215.65 billion (US$21 billion),
Total equity are worth ₹.484.72 billion (US$8.2 billion) [5].
2.3.19 BAJAJ AUTO LIMITED
Bajaj Auto Limited is an Indian two-wheeler and three-wheeler manufacturing
company. Bajaj Auto manufactures and sells motorcycles, scooters and auto rickshaws.
Bajaj Auto is a part of the Bajaj Group. It was founded by Jamnalal Bajaj in Rajasthan in
the 1930s. It is based in Pune, Mumbai, with plants in Chakan (Pune), Waluj
(near Aurangabad) and Pantnagar in Uttarakhand. The oldest plant at Akurdi (Pune) now
houses the R&D centre 'Ahead'. Bajaj Auto is the world's third-largest manufacturer of
motorcycles and the second-largest in India. It is world’s largest three-wheeler
manufacturer. On 31 March 2013, its market capitalisation was ₹.520 billion (US$9.57
billion), making it India's 23rd largest publicly traded company by market value.
The Forbes Global 2000 list for the year 2012 ranked Bajaj Auto at 1,416. 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 a licence from the Government of India to manufacture two-wheelers and three-
wheelers and it became a public limited company in 1960. In 1970, it rolled out its
100,000th vehicle. In 1977, it sold 100,000 vehicles in a financial year. In 1985, it started
producing at Waluj near Aurangabad. In 1986, it sold 500,000 vehicles in a financial year.
In 1995, it rolled out its ten millionth vehicles and produced and sold one million vehicles
in a year. With the launch of motorcycles in 1986, the company has changed its image
from a scooter manufacturer to a two-wheeler manufacturer. As of year ending 2012,
Revenue is ₹208 billion (US$3.5 billion) and Net income is ₹ 42.77 billion [5].
2.3.20 DR. REDDY'S LABORATORIES LTD
Dr. Reddy's Laboratories Ltd is a pharmaceutical company based in Hyderabad, Andhra
Pradesh, India. The company was founded by Anji Reddy, who had previously worked in
the publicly owned Indian Drugs and Pharmaceuticals Limited, of Hyderabad, India. Dr.
Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas.
The company has over 190 medications, 60 active pharmaceutical ingredients (APIs) for
drug manufacture, diagnostic kits, critical care, and biotechnology products. Dr. Reddy's
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began as a supplier to Indian drug manufacturers, but it soon started exporting to other
less-regulated markets that had the advantage of not having to spend time and money on
a manufacturing plant that would gain approval from a drug licensing body such as
the U.S. Food and Drug Administration (FDA). By the early 1990s, the expanded scale
and profitability from these unregulated markets enabled the company to begin focusing
on getting approval from drug regulators for their formulations and bulk drug
manufacturing plants in more-developed economies. This allowed their movement into
regulated markets such as the US and Europe. By 2007, Dr. Reddy's had six FDA plants
producing active pharmaceutical ingredients in India and seven FDA-inspected and ISO
9001 (quality) and ISO 14001 (environmental management) certified plants making
patient-ready medications – five of them in India and two in the UK In 2010, the family-
controlled Dr Reddy's denied that it was in talks to sell its generics business in India to US
pharmaceutical giant Pfizer, which, had been suing the company for alleged patent
infringement after Dr Reddy's announced that it intended to produce a generic version
of atorvastatin, marketed by Pfizer as Lipitor, an anti-cholesterol medication. Reddy's was
already linked to UK pharmaceuticals multinational Glaxo Smithkline. As of year ending
2012, Revenue is $2.1 billion and Net income is $300 million [5].
2.3.21 NTPC LIMITED
NTPC Limited (formerly known as National Thermal Power Corporation Limited) is a
Central Public Sector Undertaking (CPSU) under the Ministry of Power, Government of
India, engaged in the business of generation of electricity and allied activities. It is a
company incorporated under the Companies Act 1956 and a "Government Company"
within the meaning of the act. The headquarters of the company is situated at New Delhi.
NTPC's core business is generation and sale of electricity to state-owned power
distribution companies and State Electricity Boards in India. The company also
undertakes consultancy and turnkey project contracts that comprise of engineering,
project management, construction management and operation and management of power
plants. The company has also ventured into oil and gas exploration and coal mining
activities. It is the largest power company in India with an electric power generating
capacity of 42,964 MW. Although the company has approx. 18% of the total national
capacity it contributes to over 27% of total power generation due to its focus on operating
its power plants at higher efficiency levels (approx. 83% against the national PLF rate of
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78%).It was founded by Government of India in 1975, which held 75% of its equity
shares on 31 March 2013 (after divestment of its stake in 2004, 2010 and 2013). As of
year ending 2013, Revenue is ₹73904 Crores (US$ 12.34 billion) and Net income is
₹13834 Crores (US$ 2.31 billion) [5].
2.3.22 TATA CONSULTANCY SERVICES LIMITED
Tata Consultancy Services Limited (TCSL) is a multinational information technology
(IT) service, consulting and business Solutions Company headquartered in India.TCS
operates in 46 countries. It is a subsidiary of the Tata Group and is listed on the Bombay
Stock Exchange and the National Stock Exchange of India. TCS is the largest Indian
company by market capitalization and is the largest India-based IT services company by
2013 revenues.TCS is now placed among the ‘Big 4’ most valuable IT services brands
worldwide. TCS is ranked 40th overall in the Forbes World's Most Innovative Companies
ranking, making it both the highest-ranked IT services company and the top Indian
company. It is the world's 10th largest IT services provider, measured by revenues. At a
Consultancy Services Ltd (TCS) was founded in 1968 by a division of Tata Sons
Limited. Its early contracts included providing punched card services to sister company
TISCO (now Tata Steel), working on an Inter-Branch Reconciliation System for
the Central Bank of India, and providing bureau services to Unit Trust of India. As of
year ending 2013, Revenue is US$ 13.44 billion, Operating Income is US$ 3.12 billion,
Profit is US$ 2.59 billion, Total Assets are US$ 9.58 billion, and Total Equity are
worth US$ 7.66 billion[5].
2.3.23 MARUTI SUZUKI INDIA LIMITED
Maruti Suzuki India Limited commonly referred to as Maruti and formerly known
as Maruti Udyog Limited is an automobile manufacturer in India. It is a subsidiary of
Japanese automobile and motorcycle manufacturer Suzuki. As of November 2012, it had
a market share of 37% of the Indian passenger car market. Maruti Suzuki manufactures
and sells a complete range of cars from the entry level Alto, to the hatchback Ritz, A-
Star, Swift, Wagon R, Zen and sedans DZire, Kizashi and SX4, in the 'C'
segment Eeco, Omni, Multi Purpose vehicle Suzuki Ertiga and Sports Utility
vehicle Grand Vitara. Originally, 74% of the company was owned by the Indian
government, and 26% by Suzuki of Japan. As of May 2007, the government of India sold
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its complete share to Indian financial institutions and no longer has any stake in Maruti
Udyog. As of year ending 2013, Revenue is ₹432.72 billion(US$7.4 billion) and Net
income is ₹24.69 billion (US$420 million)[5].
2.3.24 BHARTI AIRTEL LIMITED
Bharti Airtel Limited, commonly known as Airtel, is an Indian multinational
telecommunications Services Company headquartered in New Delhi, India. It operates in
20 countries across South Asia, Africa, and the Channel Islands. Airtel has a GSM
network in all countries in which it operates, providing 2G, 3G and 4G services
depending upon the country of operation. Airtel is the world's second largest mobile
telecommunications company by subscribers; with over 275 million subscribers across 20
countries as of July 2013 it is the largest cellular service provider in India, with 192.22
million subscribers as of August 2013. Airtel is the Second largest in-country mobile
operator by subscriber base, behind China Mobile. Airtel is the largest provider of mobile
telephony and second largest provider of fixed telephony in India, and is also a provider
of broadband and subscription television services. It offers its telecom services under the
"airtel" brand, and is headed by Sunil Bharti Mittal. Bharti Airtel is the first Indian
telecom service provider to achieve Cisco Gold Certification. It also acts as a carrier for
national and international long distance communication services. The company has a
submarine cable landing station at Chennai, which connects the submarine cable
connecting Chennai and Singapore. As of year ending 2013, Revenue is 809.22₹
billion (US$14 billion), Operating income 248.62 billion₹ (US$4.2 billion), Profit 22.67₹
billion (US $390 million), Total assets are 432.72 billion₹ (US$7.4 billion), Total equity
are worth of 1273.7 billion₹ (US$22 billion)[5].
2.3.25 HOUSING DEVELOPMENT FINANCE CORPORATION
LIMITED
Housing Development Finance Corporation Limited (HDFC) is an Indian Financial
conglomerate based in Mumbai, India. It is a major player for housing finance in India. It
also has a presence in banking, life and general insurance, asset management, venture
capital and education loans. It was founded in 1977 as the first specialised Mortgage
Company in India. HDFC was promoted by the Industrial Credit and Investment
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Corporation of India, Hasmukhbhai Parekh played a key role in the foundation of this
company. In 2000, HDFC Asset Management company launched its mutual fund
schemes. In the same year, IRDA granted registration to HDFC Standard Life Insurance,
as the first private sector life insurance company in India. As of year ending 2012,
Revenue is US$ 3.44 Billion and Net income is US$ 1.17 Billion [5].
2.2.26 ICICI BANK
ICICI Bank is an Indian multinational banking and financial services company
headquartered in Mumbai. It is the second largest bank in India by assets and by market
capitalization, as of 2014. It offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries in the areas of investment, life, non-life
insurance, venture capital and asset management. The Bank has a network of 3,539
branches and 11,162 ATMs in India, and has a presence in 19 countries.
ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab
National Bank and Bank of Baroda. The bank has subsidiaries in the United Kingdom,
Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri
Lanka, Qatar and Dubai International Finance Centre; and representative offices in United
Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The
company's UK subsidiary has also established branches in Belgium and Germany.
In March 2013, Operation Red Spider showed high-ranking officials and some employees
of ICICI Bank involved in money laundering. After a government inquiry, ICICI Bank
suspended 18 employees and faced penalties from the Reserve Bank of India in relation to
the activity. As of year ending 2012, Revenue is US$ 13.52 billion, Operating income is
US$ 2.12 billion, Profit is US$ 1.60 billion, Total assets are US$98.99 billion, and Total
equity are worth US$12.62 billion[5].
2.3.27 GAIL (INDIA) LIMITED
GAIL (India) Limited is the largest state-owned natural gas processing and distribution
company in India, It is headquartered in New Delhi. It has following business segments:
Natural Gas, Liquid Hydrocarbon, Liquefied petroleum gas Transmission, Petrochemical,
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City Gas Distribution, Exploration and Production, GAILTEL and Electricity Generation.
GAIL has been conferred with the Maharatnastatus on 1 Feb 2013, by the Government of
India. Only six other Public Sector Enterprises (PSEs) enjoy this coveted status amongst
all central CPSEs. GAIL (India) Limited was incorporated in August 1984 as a Central
Public Sector Undertaking (PSU) under the Ministry of Petroleum & Natural Gas
(MoP&NG). The company used to be known as Gas Authority of India Limited. It is
India's principal gas transmission and marketing company. The company was initially
given the responsibility of construction, operation & maintenance of the Hazira –
Vijaypur – Jagdishpur (HVJ) pipeline project. It was one of the largest cross-country
natural gas pipeline projects in the world. This 1800-kilometre-long pipeline was built at
a cost of ₹17 billion (US$290 million) and it laid the foundation for development of
market for natural gas in India. GAIL commissioned the 2,800 kilometres (1,700 mi)
Hazira-Vijaipur-Jagdishpur (HVJ) pipeline in 1991. Between 1991 and 1993,
three liquefied petroleum gas (LPG) plants were constructed and some regional pipelines
acquired, enabling GAIL to begin its gas transportation in various parts of India. As of
year ending 2013, Revenue is ₹473 billion (US$8.0 billion) and Net income ₹40
billion (US$680 million)[5].
2.3.28 SUN PHARMACEUTICAL INDUSTRIES LIMITED
Sun Pharmaceutical Industries Limited is a multinational pharmaceutical company
headquartered in Mumbai, Maharashtra that manufactures and sells pharmaceutical
formulations and active pharmaceutical ingredients (APIs) primarily in India and the
United States. The company offers formulations in various therapeutic areas, such
ascardiology, psychiatry, neurology, gastroenterology and diabetology. It also provides
APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well as anticancer,
steroids, peptides, sex hormones, and controlled substances. Sun Pharmaceuticals was
established by Mr. Dilip Shanghvi in 1983 in Vapi with five products to
treat psychiatry ailments. Cardiology products were introduced in 1987 followed
by gastroenterology products in 1989. Today it is the largest chronic prescription
company in India and a market leader in psychiatry, neurology, Cardiology,
Orthopaedics, ophthalmology, gastroenterology and nephrology. The 2014 acquisition
of Ranbaxy will make the company the largest pharmaceutical company in India, the
largest Indian pharmaceutical company in the US, and the 5th largest speciality generic
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company globally. As of the year ending 2013, Revenue is ₹120.05 billion
(US$2.0 billion), and Net income is ₹36.72 billion (US$620 million)[5].
2.3.29 WIPRO LIMITED
Wipro Limited (formerly Western India Products Limited]) is a multinational IT
Consulting and System Integration services company headquartered in Bangalore,
Karnataka, India. As of March 2014, the company has 146,000 employees servicing over
900 large enterprise corporations with a presence in 61 countries. On 31 March 2014, its
market capitalisation was approximately ₹1.27 trillion ($20.8 billion), making it one of
India's largest publicly traded company. Azim Premji is a major shareholder in Wipro
with over 50% of shareholding.
To focus on core IT Business, it demerged its non-IT businesses into a separate company
named Wipro Enterprises Limited with effect from 31 March 2013. The demerged
company offers consumer care, lighting, healthcare and infrastructure engineering and
contributed to approx. 10% of the revenues of Wipro Limited in previous financial year.
As of the year ending to 2013, Revenue is ₹437.6 billion (US$7.3 billion), Operating
income is ₹89.3 billion (US$1.49 billion), Profit is ₹78.4 billion (US$1.3 billion, Total
assets are ₹502.3 billion (US$8.37 billion) and Total equity are worth of ₹344.9 billion
(US$5.75 billion)[5].
2.3.30 SESA STERLITE
Sesa Sterlite, a Vedanta Group company is one of the world's largest global diversified
natural resource majors, with operations across zinc-lead-silver, oil & gas, iron ore,
copper, aluminium and commercial power. For more than five decades, it has been
engaged in exploration, mining and processing of iron ore. The company was founded in
1954, as Scambi Economici SA Goa. Since then, it has grown to be one among the top
low-cost producers of iron ore in the world. During 1991-1995, it diversified into the
manufacture of pig iron and metallurgical coke. It has also developed indigenous and
environment-friendly technology for producing high quality metallurgical coke. In 2007,
it became a majority-owned subsidiary of Vedanta Resources Plc, listed on the London
Stock Exchange, when Vedanta acquired 51% controlling stake from Mitsui & Co., Ltd.
In June 2009, Sesa Goa Limited acquired VS Dempo & Co. Private Limited (now Sesa
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Resources Limited) along with its fully owned subsidiary Dempo Mining Corporation
(now Sesa Mining Corporation Limited) and 50% equity in Goa Maritime Private
Limited. In 2011, Sesa acquired 51% stake in Western Cluster Limited, Liberia. Sesa Goa
Limited’s operations are located predominantly in Goa and Karnataka, with offices in
various locations across India. Its head office in India in Panaji, Goa, while its Liberia
office is in Monrovia and China office is in Shanghai. As on year ending 2010, Revenue
is ₹62.84 billion and Net income is ₹26.29 billion [5].
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CHAPTER-3
THEORITICAL BACKGROUND
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3.0 THEORITICAL BACKGROUND
3.1 CAPM
The Capital Assets Pricing Model, denoted CAPM, describes the relationship between
risk and expected return and is used in the pricing of risky securities [5]. This relationship
was first proposed independently by John Lintner, William F. Sharpe and Mossin, which
can be represented by the following linear equation:
E [Ri] = R f +β (Rm -Rf)
Where, Rf = Risk free rate of return
β = Beta Value
Rm = Market Return
(Rm –Rf) = Market premium.
The CAPM introduced that the expected return of a security or a portfolio equals the rate
of return on a risk-free rate plus a risk premium. This model offers a simple tool for
investors to evaluate their investments. If this expected return does not meet or beat the
required return, then the investment should not be undertaken [5].
The CAPM is a ceteris paribus model. It is only valid within a special set of assumptions,
which are mainly listed below.
All the investors are risk averse; they will maximize the expected utility of their
end of period wealth.
All the investors use the same expected return and covariance matrix of stock
return to form the optimal risky portfolio. That is referred to as homogenous
expectations (beliefs) about asset returns.
A fixed risk-free rate exists, and allows the investors to borrow or lend unlimited
amounts to the same interest rate.
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There are a definite number of stocks and their quantities are fixed within the one
period world.
All stocks are perfectly divisible and priced in a perfectly competitive market.
There are no market imperfections. Implication: there are no taxes, regulations, or
trading costs.
There is no uncertainty about expected inflation; or, alternatively all security
prices fully reflect all changes in future inflation expectations.
Capital markets are in equilibrium. That is, all investment decisions have been
made and there is no further trading without new information.
Some of the above assumptions are clearly unrealistic. However, the assumptions are not
as restrictive as it appears initially and some of them can be relaxed without altering the
basic nature of the model.
The market portfolio in CAPM is the unanimously desirable risky portfolio which
contains all risky assets. Thus return on market portfolio is weighted average of return of
all risky assets in the market and in theory it should contain, besides ordinary shares, all
assets, like art objects, commodities, and real estates and so on[5].
This model presents a very simple theory that delivers a simple result. The theory says
that the only reason an investor should earn more, on average, by investing in one stock
rather than another is that one stock is riskier. Not surprisingly, the model has come to
dominate modern financial theory. It's not entirely clear. The big sticking point is beta.
When professors Eugene Fama and Kenneth French looked at share returns on the New
York Stock Exchange, the American Stock Exchange and NASDAQ between 1963 and
1990, they found that differences in betas over that lengthy period did not explain the
performance of different stocks. The linear relationship between beta and individual stock
returns also breaks down over shorter periods of time. These findings seem to suggest that
CAPM may be wrong.
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While some studies raise doubts about CAPM's validity, the model is still widely used in
the investment community. Although it is difficult to predict from beta how individual
stocks might react to particular movements, investors can probably safely deduce that a
portfolio of high-beta stocks will move more than the market in either direction, or a
portfolio of low-beta stocks will move less than the market.
This is important for investors - especially fund managers - because they may be
unwilling to or prevented from holding cash if they feel that the market is likely to fall. If
so, they can hold low-beta stocks instead. Investors can tailor a portfolio to their
specific risk-return requirements, aiming to hold securities with betas in excess of 1 while
the market is rising, and securities with betas of less than 1 when the market is falling [5].
Not surprisingly, CAPM contributed to the rise in use of indexing - assembling a portfolio
of shares to mimic a particular market - by risk averse investors. This is largely due to
CAPM's message that it is only possible to earn higher returns than those of the market as
a whole by taking on higher risk (beta).
However in practice it is impossible to construct a market proxy which contains all assets
and thus, all the commonly used market indices roughly replicate the market. The total
risk of a portfolio can be measured by the variance of its return. In a more general
situation of a portfolio p consists of n shares and any individual share ‘i’ has a weightage
of Xi in the portfolio, then the total risk can be expressed as follows:
2p = n
t=1 Xi2 + (n
t=i Xi i)2 2
m
i-e 2p = 2
ep + p2
2m
Total Risk = Unsystematic Risk + Systematic Risk
If CAPM holds, then investors should hold diversified portfolios and the systematic risk
or non-diversifiable risk will be the only risk which will be of importance to the investors.
The other part of the risk, known as the diversifiable risk or unsystematic risk will be
reduced to nil by holding a diversified portfolio.
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Thus beta, which is a measure of the non-diversifiable risk in a portfolio, is most
important for investors, from the point of view CAPM theory. In case the CAPM holds in
the market, an investor will no longer require any sophisticated portfolio selection
technique to select his portfolio.
He will choose a mix between risk-free rate and the market portfolio based on his utility
function. In other words optimal investment decision will be simply to buy the market
portfolio. This investment decision is independent from the decision about how to finance
the investment i.e. whether to lend or borrow at the risk-free rate.
Ideally, if CAPM holds, there will not be any identifiable inefficiency in the market and
all securities will lie on the security market line (no security can be found which is
wrongly priced). However, such a situation is not realistic even in a highly developed and
efficient capital market as in the United States. But on an average, if the inefficiencies in
the market are not extreme, the assumptions of the CAPM can be approximately valid
even in a realistic situation. In such a situation majority of the securities (assets) in the
market will be efficiently priced. Thus even though it is known that no market in the
world is efficient in a perfect sense, empirical tests of CAPM can still give meaningful
results[5].
Thus capital asset pricing model, almost always referred to as the CAPM, is a centerpiece
of modern financial economics. The model gives us a precise prediction of the
relationship that we should observe between the risk of an asset and its expected return.
This relationship serves two vital functions. First, it provides a benchmark rate of return
for evaluating possible investments. For example, if we are analyzing securities, we might
be interested in whether the expected return we forecast for a stock is more or less than its
“fair” return given its risk.
Second, the model helps us to make an educated guess as to the expected return on assets
that have not yet been traded in the marketplace. The capital asset pricing model is a set
of predictions concerning equilibrium expected returns on risky assets [5].
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3.2 BETA (β)
Beta (β) of a portfolio is a ratio describing the correlated volatility of an asset in relation
to the volatility of the benchmark that the asset is being compared to. This benchmark is
generally the overall financial market and is often estimated via the application of
representative indices, such as the S&P 500. "Beta measures systematic risk based on
how returns can move with the overall market.” Some interpretations of beta are
explained in the following table:
Table 3.1: Beta Ratio Interpretation
Value of
BetaInterpretation
β < 0 Asset generally moves in the opposite direction as compared to the index.
β = 0 Movement of the asset is uncorrelated with the movement of the
benchmark
0 < β < 1 Movement of the asset is generally in the same direction as, but less than
the movement of the benchmark
β = 1 Movement of the asset is generally in the same direction as, and about the
same amount as the movement of the benchmark
β > 1 Movement of the asset is generally in the same direction as, but more
than the movement of the benchmark
It measures the part of the asset ' s statistical variance that cannot be removed by the
diversification provided by the portfolio of many risky assets, because of the correlation of its
returns with the returns of the other assets that are in the portfolio. Beta can be estimated for
individual companies using regression analysis against a stock market index. The beta coefficient
is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's
statistical variance that cannot be mitigated by the diversification provided by the portfolio of
many risky assets, because it is correlated with the return of the other assets that are in the
portfolio. Beta can be estimated for individual companies using regression analysis against a stock
market index. The formula for the Beta of an asset within a portfolio is
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Where, ra =rate of return of the asset,
rp = rate of return of the portfolio,
Cov(ra,rp) = covariance between the rates of return.
In the CAPM formulation, the portfolio is the market portfolio that contains all risky
assets, and so the Rp terms in the formula are replaced by m, the rate of return of the
market [5].
3.3. ALPHA ()
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the
return in excess of the compensation for the risk borne, and thus commonly used to
assess active managers' performances. Often, the return of a benchmark is subtracted in
order to consider relative performance, which yields Jensen's alpha.
Besides an investment manager simply making more money than a passive strategy, there
is another issue: although the strategy of investing in every stock appeared to perform
better than 75 percent of investment managers (see index fund), the price of the stock
market as a whole fluctuates up and down, and could be on a downward decline for many
years before returning to its previous price.
The passive strategy appeared to generate the market-beating return over periods of 10
years or more. This strategy may be risky for those who feel they might need to withdraw
their money before a 10-year holding period, for example. Thus investment managers
who employ a strategy which is less likely to lose money in a particular year are often
chosen by those investors who feel that they might need to withdraw their money sooner.
Investors can use both alpha and beta to judge a manager's performance. If the manager
has had a high alpha, but also a high beta, investors might not find that acceptable,
because of the chance they might have to withdraw their money when the investment is
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
doing poorly. These concepts not only apply to investment managers, but to any kind of
investment [5].
3.4 RESIDUAL VALUE (e)
Errors and residuals are two closely related and easily confused measures of the
deviation of an observed value of an element of a statistical sample from its "theoretical
value". The error (or disturbance) of an observed value is the deviation of the observed
value from the (unobservable) true function value, while the residual of an observed value
is the difference between the observed value and the estimated function value [5].
3.5 SECURITY MARKET LINE
We can view the expected return–beta relationship as a reward-risk equation. The beta of
a security is the appropriate measure of its risk because beta is proportional to the risk that
the security contributes to the optimal risky portfolio.
Risk-averse investors measure the risk of the optimal risky portfolio by its variance. In
this world we would expect the reward or the risk premium on individual assets, to
depend on the contribution of the individual asset to the risk of the portfolio. The beta of a
stock measures the stock’s contribution to the variance of the market portfolio. Hence we
expect, for any asset or portfolio, the required risk premium to be a function of beta.
The CAPM confirms this intuition, stating further that the security’s risk premium is
directly proportional to both the beta and the risk premium of the market portfolio; that is,
the risk premium equals [E(Rm) – Rf].
The expected return–beta relationship can be portrayed graphically as the security market
line (SML) in Figure 3.1. Because the market beta is 1, the slope is the risk premium of
the market portfolio. At the point on the horizontal axis where beta is 1 (which is the
market portfolio’s beta) we can read off the vertical axis the expected return on the
market portfolio.
It is useful to compare the security market line to the capital market line. The CML
graphs the risk premiums of efficient portfolios (i.e., portfolios composed of the market
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
and the risk-free asset) as a function of portfolio standard deviation. This is appropriate
because standard deviation is a valid measure of risk for efficiently diversified portfolios
that are candidates for an investor’s overall portfolio.
The SML, in contrast, graphs individual asset risk premiums as a function of asset risk.
The relevant measure of risk for individual assets held as parts of well-diversified
portfolios is not the asset’s standard deviation or variance; it is, instead, the contribution
of the asset to the portfolio variance, which we measured by the asset’s beta. The SML is
valid for both efficient portfolios and individual assets.
The security market line provides a benchmark for the evaluation of investment
performance. Given the risk of an investment, as measured by its beta, the SML provides
the required rate of return necessary to compensate investors for both risk as well as the
time value of money.
Figure 3.1 Security Market Line (SML)
Because the security market line is the graphic representation of the expected Return–beta
relationship, “fairly priced” assets plot exactly on the SML; that is, their expected returns
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
are commensurate with their risk. Given the assumptions we made at the start of this
section, all securities must lie on the SML in market equilibrium.
Nevertheless, the CAPM may be of use in the money-management industry. Suppose that
the SML relation is used as a benchmark to assess the fair expected return on a risky
asset. Then security analysis is performed to calculate the return actually expected.
If a stock is perceived to be a good buy, or underpriced, it will provide an expected return
in excess of the fair return stipulated by the SML. Underpriced stocks therefore plot
above the SML: Given their betas, their expected returns are greater than dictated by the
CAPM. Overpriced stocks plot below the SML. The difference between the fair and
actually expected rates of return on a stock is called the stock’s alpha, denoted ‘α’ [5].
3.6 CAPITAL MARKET LINE (CML)
Capital Market Line (CML) is the tangent line drawn from the point of the risk-free asset
to the feasible region for risky assets. The tangency point M represents the market
portfolio, so named since all rational investors (minimum variance criterion) should hold
their risky assets in the same proportions as their weights in the market portfolio.
The CML results from the combination of the market portfolio and the risk-free asset (the
point L). All points along the CML have superior risk-return profiles to any portfolio on
the efficient frontier, with the exception of the Market Portfolio, the point on the efficient
frontier to which the CML is the tangent. From a CML perspective, this portfolio is
composed entirely of the risky asset, the market, and has no holding of the risk free asset,
i.e., money is neither invested in, nor borrowed from the money market account. Addition
of leverage (the point R) creates levered portfolios that are also on the CML[5].
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Figure 3.2 Capital Market Line (CML)
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CHAPTER-4
DATA ANALYSIS
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
4.0 DATA ANALYSIS
The process of evaluating data using analytical and logical reasoning to examine each
component of the data provided. This form of analysis is just one of the many steps that
must be completed when conducting a research experiment. For the analysis of the stock
price in Sensex, daily share price was collected from the website of Bombay stock
exchange [7]. The Daily return (in terms of percentage) of the shares and the index is
calculated using below mentioned formula and it is applied in MS-EXCEL.
R= LOGe ( Rt / Rt-1 ) * 100
Where , Rt = Current Price of the share
Rt-1= Previous Price of the share
4.1 CALCULATION OF MARKET RETURN (Rm)
Return on market portfolio is also calculated by taking first and last day return of the year
using above mentioned formula out of daily returns. The Rm is calculated for 1year (01-
April-2013 to 31-March-2014), 2year (01-April-2012 to 31-March-2014), and 3year (01-
April-2011 to 31-March-2014) return on market. The risk-free rate (R f) represents the
interest an investor would expect from an absolutely risk-free investment over a specified
period of time. Generally average T-bill rate for 3 months are taken as risk free rate [8].
The average t-bill rate is 8%.
4.2 REGRESSION ANALYSIS
Regression analysis is a statistical process for estimating the relationships among
variables. It includes many techniques for modelling and analyzing several variables,
when the focus is on the relationship between a dependent variable and one or
more independent variables. More specifically, regression analysis helps one understand
how the typical value of the dependent variable changes when any one of the independent
variables is varied, while the other independent variables are held fixed [5]. Calculation of
regression analysis will help us to get the Beta, Alpha and Residual value.
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Table 4.1 Alpha, Beta and Residual values
S.NO SHARES ALPHA BETA RESIDUAL
1 AXIS BANK -0.01059 1.535544 0.537712
2 BAJAJ AUTO 0.014438 0.737253 0.372102
3 BHEL -0.15123 1.622856 7.28459
4 BHARATI AIRTEL -0.01413 0.951411 0.597828
5 CIPLA 0.006533 0.468113 0.332894
6 COAL INDIA -0.01617 0.638861 0.519513
7 DR. REDDY's LABORATRIES 0.02304 0.440162 0.306181
8 GAIL (INDIA) -0.01742 0.635025 0.385112
9 HDFC BANK -0.07469 1.054323 6.716553
10 HDFC LTD. 0.004135 1.075318 0.266154
11 HERO MOTOCORP 0.015072 0.631688 0.476478
12 HINDALCO LTD. -0.03583 1.451236 0.702224
13 HUL 0.03984 0.476134 0.413856
14 ICICI -0.0058 1.558988 0.296063
15 INFOSYS -0.00556 0.805005 0.588485
16 ITC 0.032601 0.682341 0.290796
17 L&T -0.02567 1.27986 0.792379
18 MAHINDRA & MAHINDRA 0.011109 0.925037 0.388346
19 MARUTHI SUZUKI 0.018737 0.799259 0.552048
20 NTPC -0.03236 0.726139 0.552048
21 ONGC -0.00234 0.878868 0.455797
22 RIL -0.01581 1.157202 0.258779
23 SBI -0.0306 1.253038 0.417828
24 SESA STERLITE -0.03731 1.298529 0.846829
25 SUN PHARMACEUTICALS 0.009757 0.596703 1.534488
26 TCS 0.028172 0.737861 0.428488
27 TATA MOTORS -0.08077 1.782513 7.272414
28 TATA POWER -0.16885 1.165677 14.09323
29 TATA STEEL -0.03818 1.369855 0.520674
30 WIPRO 0.0024 0.632783 0.489063
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Figure 4.1 Alpha values of the shares
ANALYSIS:
Alpha is the return in excess of the compensation for the risk borne, and thus commonly
used to assess active managers' performances. Figure 3.1 indicates that HUL, ITC and
TCS have high alpha value whereas Tata Power, BHEL and Tata Motors have the lowest
alpha value. ONGC and WIPRO have the alpha value close to zero.
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Figure 4.2 Beta values of the shares
ANALYSIS:
The beta coefficient describes how the expected return of a stock or portfolio is correlated
to the return of the financial market as a whole. An asset with a beta of 0 means that its
price is not at all correlated with the market; that asset is independent. A positive beta
means that the asset generally follows the market. A negative beta shows that the asset
inversely follows the market; the asset generally decreases in value if the market goes up
and vice versa. In Figure 4.2 Tata Motors, BHEL and ICICI have high beta value and Dr.
Reddy’s, CIPLA and HUL have lowest of beta value.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Figure 4.3 Residual values of the shares
ANALYSIS:
Residuals are the deviation of an observed value of an element of a statistical
sample from its "theoretical value". Figure 4.3 indicates that Tata Power, BHEL and Tata
motors have high residual value and RIL, HDFC and ITC have the lowest residual value.
4.3 CALCULATION OF RETURN [Ri]
Returns are calculated using the formula which is given below in MS-EXCEL, for the
market return (Rm) of 1 year, 2 year and 3 year respectively.
Ri= + Rm+e
Table 4.2 Return for the period of 1 year (Rm)
S.NO STOCKS ALPHA BETA Rm RESIDUAL Ri
1 AXIS BANK -0.01059 1.535544 7 0.537712 11.2759278
2 BAJAJ AUTO 0.014438 0.737253 7 0.372102 5.54731026
3 BHEL -0.15123 1.622856 7 7.28459 18.4933524
4 BHARATI AIRTEL -0.01413 0.951411 7 0.597828 7.24356892
5 CIPLA 0.006533 0.468113 7 0.332894 3.616215
6 COAL INDIA -0.01617 0.638861 7 0.519513 4.97537163
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7 DR. REDDY's 0.02304 0.440162 7 0.306181 3.41035188
8 GAIL (INDIA) -0.01742 0.635025 7 0.385112 4.81286529
9 HDFC BANK -0.07469 1.054323 7 6.716553 14.0221211
10 HDFC LTD. 0.004135 1.075318 7 0.266154 7.79751505
11 HERO MOTOCORP 0.015072 0.631688 7 0.476478 4.91336776
12 HINDALCO LTD. -0.03583 1.451236 7 0.702224 10.8250485
13 HUL 0.03984 0.476134 7 0.413856 3.78663628
14 ICICI -0.0058 1.558988 7 0.296063 11.2031841
15 INFOSYS -0.00556 0.805005 7 0.588485 6.21796063
16 ITC 0.032601 0.682341 7 0.290796 5.09978368
17 L&T -0.02567 1.27986 7 0.792379 9.72572495
18 M & M 0.011109 0.925037 7 0.388346 6.87471223
19 MARUTHI SUZUKI 0.018737 0.799259 7 0.552048 6.16559515
20 NTPC -0.03236 0.726139 7 0.552048 5.60266432
21 ONGC -0.00234 0.878868 7 0.455797 6.60553396
22 RIL -0.01581 1.157202 7 0.258779 8.34338531
23 SBI -0.0306 1.253038 7 0.417828 9.15849188
24 SESA STERLITE -0.03731 1.298529 7 0.846829 9.89922056
25 SUN PHARMA. 0.009757 0.596703 7 1.534488 5.72116797
26 TCS 0.028172 0.737861 7 0.428488 5.62168735
27 TATA MOTORS -0.08077 1.782513 7 7.272414 19.669233
28 TATA POWER -0.16885 1.165677 7 14.09323 22.0841284
29 TATA STEEL -0.03818 1.369855 7 0.520674 10.0714839
30 WIPRO 0.0024 0.632783 7 0.489063 4.92094649
ANALYSIS:
Table 4.2 indicates that the Tata Power, Tata Motors and BHEL have done well in the
market. Dr. Reddys, CIPLA and HUL have the lowest returns when compared to others.
This can be interpreted that Pharmaceutical, Automobile, IT and FMCG industries have
generated lower returns due to recession. Banking and Infrastructure industries have done
considerably well in the market.
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Table 4.3 Return for the period of 2 year (Rm)
S.NO STOCKS ALPHA BETA Rm RESIDUAL Ri
1 AXIS BANK -0.01059 1.535544 10 0.537712 15.88256
2 BAJAJ AUTO 0.014438 0.737253 10 0.372102 7.759069
3 BHEL -0.15123 1.622856 10 7.28459 23.36192
4 BHARATI AIRTEL -0.01413 0.951411 10 0.597828 10.0978
5 CIPLA 0.006533 0.468113 10 0.332894 5.020553
6 COAL INDIA -0.01617 0.638861 10 0.519513 6.891956
7 DR. REDDY's 0.02304 0.440162 10 0.306181 4.730837
8 GAIL (INDIA) -0.01742 0.635025 10 0.385112 6.71794
9 HDFC BANK -0.07469 1.054323 10 6.716553 17.18509
10 HDFC LTD. 0.004135 1.075318 10 0.266154 11.02347
11 HERO MOTOCORP 0.015072 0.631688 10 0.476478 6.808432
12 HINDALCO LTD. -0.03583 1.451236 10 0.702224 15.17876
13 HUL 0.03984 0.476134 10 0.413856 5.215039
14 ICICI -0.0058 1.558988 10 0.296063 15.88015
15 INFOSYS -0.00556 0.805005 10 0.588485 8.632975
16 ITC 0.032601 0.682341 10 0.290796 7.146807
17 L&T -0.02567 1.27986 10 0.792379 13.5653
18 M & M 0.011109 0.925037 10 0.388346 9.649822
19 MARUTHI SUZUKI 0.018737 0.799259 10 0.552048 8.563371
20 NTPC -0.03236 0.726139 10 0.552048 7.781083
21 ONGC -0.00234 0.878868 10 0.455797 9.242139
22 RIL -0.01581 1.157202 10 0.258779 11.81499
23 SBI -0.0306 1.253038 10 0.417828 12.91761
24 SESA STERLITE -0.03731 1.298529 10 0.846829 13.79481
25 SUN PHARMA. 0.009757 0.596703 10 1.534488 7.511278
26 TCS 0.028172 0.737861 10 0.428488 7.835271
27 TATA MOTORS -0.08077 1.782513 10 7.272414 25.01677
28 TATA POWER -0.16885 1.165677 10 14.09323 25.58116
29 TATA STEEL -0.03818 1.369855 10 0.520674 14.18105
30 WIPRO 0.0024 0.632783 10 0.489063 6.819296
ANALYSIS:
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Table 4.3 indicates that the Tata Power, Tata Motors and BHEL have done well in the
market. Dr. Reddys, CIPLA and HUL have the lowest returns when compared to others.
The table indicates that Pharmaceutical, Automobile, IT and FMCG industries have
generated lower returns due to recession. Banking and Infrastructure industries have done
considerably well in the market. Tata group stocks have done exceptionally well in the
market.
Table 4.4 Return for the period of 3 year (Rm)
S.NO STOCKS ALPHA BETA Rm RESIDUAL Ri
1 AXIS BANK -0.01059 1.535544 6 0.537712 9.740384
2 BAJAJ AUTO 0.014438 0.737253 6 0.372102 4.810057
3 BHEL -0.15123 1.622856 6 7.28459 16.8705
4 BHARATI AIRTEL -0.01413 0.951411 6 0.597828 6.292158
5 CIPLA 0.006533 0.468113 6 0.332894 3.148102
6 COAL INDIA -0.01617 0.638861 6 0.519513 4.33651
7 DR. REDDY's 0.02304 0.440162 6 0.306181 2.97019
8 GAIL (INDIA) -0.01742 0.635025 6 0.385112 4.177841
9 HDFC BANK -0.07469 1.054323 6 6.716553 12.9678
10 HDFC LTD. 0.004135 1.075318 6 0.266154 6.722197
11 HERO MOTOCORP 0.015072 0.631688 6 0.476478 4.28168
12 HINDALCO LTD. -0.03583 1.451236 6 0.702224 9.373812
13 HUL 0.03984 0.476134 6 0.413856 3.310502
14 ICICI -0.0058 1.558988 6 0.296063 9.644196
15 INFOSYS -0.00556 0.805005 6 0.588485 5.412956
16 ITC 0.032601 0.682341 6 0.290796 4.417443
17 L&T -0.02567 1.27986 6 0.792379 8.445865
18 M & M 0.011109 0.925037 6 0.388346 5.949676
19 MARUTHI SUZUKI 0.018737 0.799259 6 0.552048 5.366337
20 NTPC -0.03236 0.726139 6 0.552048 4.876525
21 ONGC -0.00234 0.878868 6 0.455797 5.726666
22 RIL -0.01581 1.157202 6 0.258779 7.186183
23 SBI -0.0306 1.253038 6 0.417828 7.905454
24 SESA STERLITE -0.03731 1.298529 6 0.846829 8.600692
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25 SUN PHARMA. 0.009757 0.596703 6 1.534488 5.124465
26 TCS 0.028172 0.737861 6 0.428488 4.883826
27 TATA MOTORS -0.08077 1.782513 6 7.272414 17.88672
28 TATA POWER -0.16885 1.165677 6 14.09323 20.91845
29 TATA STEEL -0.03818 1.369855 6 0.520674 8.701629
30 WIPRO 0.0024 0.632783 6 0.489063 4.288163
ANALYSIS:
Table 4.4 indicates that the Tata Power, Tata Motors and BHEL have performed well not
only during short term but also for the long term and it have also generated good returns.
Dr. Reddy’s, CIPLA and HUL have the lowest returns when compared to others. The
table indicates that Pharmaceutical, Automobile, IT and FMCG industries have generated
lower returns. Although automobile industries are not doing well in the market, Tata
motors is an exception. Banking and Infrastructure industries have done considerably well
in the market. Tata group stocks have done exceptionally well in the market.
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Figure 4.4 Comparison of 1yr, 2 yr and 3 yr return of the shares
ANALYSIS:
Figure 4.4 indicates that the Tata Power, Tata Motors and BHEL have performed well not
only during short term but also for the long term. Dr. Reddy’s, CIPLA and HUL have the
lowest returns when compared to others. The Figure indicates that Pharmaceutical,
Automobile, IT and FMCG industries have generated lower returns. Banking and
Infrastructure industries have done considerably well in the market. Tata group stocks
have done exceptionally well in the market. The stock of all the company follows the
same trend over the 1year, 2 year and 3 year.
4.4 CALCULATION OF EXPECTED RETURN E[Ri]
Expected return E[Ri] are calculated using the CAPM formula which is given below in
MS-EXCEL, for the market return (Rm) of 1 year, 2 year and 3 year respectively.
E[Ri]= Rf + (Rm – Rf)
Table 4.5 Expected Return for the period of 1year (Rm)
S.NO STOCKS Rf BETA Rm Rm - Rf E[Ri]
1 AXIS BANK 8 1.535544 7 -1 6.4644562
2 BAJAJ AUTO 8 0.737253 7 -1 7.2627471
3 BHEL 8 1.622856 7 -1 6.3771435
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4 BHARATI AIRTEL 8 0.951411 7 -1 7.0485892
5 CIPLA 8 0.468113 7 -1 7.5318873
6 COAL INDIA 8 0.638861 7 -1 7.3611386
7 DR. REDDY's 8 0.440162 7 -1 7.5598383
8 GAIL (INDIA) 8 0.635025 7 -1 7.3649753
9 HDFC BANK 8 1.054323 7 -1 6.9456767
10 HDFC LTD. 8 1.075318 7 -1 6.924682
11 HERO MOTOCORP 8 0.631688 7 -1 7.3683119
12 HINDALCO LTD. 8 1.451236 7 -1 6.5487636
13 HUL 8 0.476134 7 -1 7.5238656
14 ICICI 8 1.558988 7 -1 6.4410117
15 INFOSYS 8 0.805005 7 -1 7.1949951
16 ITC 8 0.682341 7 -1 7.317659
17 L&T 8 1.27986 7 -1 6.7201403
18 M & M 8 0.925037 7 -1 7.0749633
19 MARUTHI SUZUKI 8 0.799259 7 -1 7.2007414
20 NTPC 8 0.726139 7 -1 7.2738606
21 ONGC 8 0.878868 7 -1 7.1211317
22 RIL 8 1.157202 7 -1 6.8427979
23 SBI 8 1.253038 7 -1 6.7469618
24 SESA STERLITE 8 1.298529 7 -1 6.7014711
25 SUN PHARMA. 8 0.596703 7 -1 7.4032968
26 TCS 8 0.737861 7 -1 7.2621389
27 TATA MOTORS 8 1.782513 7 -1 6.2174866
28 TATA POWER 8 1.165677 7 -1 6.8343226
29 TATA STEEL 8 1.369855 7 -1 6.630145
30 WIPRO 8 0.632783 7 -1 7.3672167
ANALYSIS:
Table 4.5 indicates that the expected return of Dr. Reddy’s, CIPLA, WIPRO and HUL
have high returns when compared to others, while Tata motors, BHEL, ICICI Bank and
Axis Bank have low return. The table indicates that Pharmaceutical, IT and FMCG
industries have high return. Banking sector have low return
Table 4.6 Expected Return for the period of 2year (Rm)
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S.NO STOCKS Rf BETA Rm Rm - Rf E[Ri]
1 AXIS BANK 8 1.535544 10 2 11.07108752 BAJAJ AUTO 8 0.737253 10 2 9.474505713 BHEL 8 1.622856 10 2 11.24571294 BHARATI AIRTEL 8 0.951411 10 2 9.902821595 CIPLA 8 0.468113 10 2 8.93622536 COAL INDIA 8 0.638861 10 2 9.277722797 DR. REDDY's 8 0.440162 10 2 8.880323328 GAIL (INDIA) 8 0.635025 10 2 9.270049499 HDFC BANK 8 1.054323 10 2 10.1086467
10 HDFC LTD. 8 1.075318 10 2 10.150635911 HERO MOTOCORP 8 0.631688 10 2 9.2633762912 HINDALCO LTD. 8 1.451236 10 2 10.902472713 HUL 8 0.476134 10 2 8.9522687214 ICICI 8 1.558988 10 2 11.117976615 INFOSYS 8 0.805005 10 2 9.6100098916 ITC 8 0.682341 10 2 9.364681917 L&T 8 1.27986 10 2 10.559719318 M & M 8 0.925037 10 2 9.8500733319 MARUTHI SUZUKI 8 0.799259 10 2 9.5985171220 NTPC 8 0.726139 10 2 9.4522788421 ONGC 8 0.878868 10 2 9.7577366522 RIL 8 1.157202 10 2 10.314404123 SBI 8 1.253038 10 2 10.506076424 SESA STERLITE 8 1.298529 10 2 10.597057825 SUN PHARMA. 8 0.596703 10 2 9.1934063526 TCS 8 0.737861 10 2 9.4757222327 TATA MOTORS 8 1.782513 10 2 11.565026928 TATA POWER 8 1.165677 10 2 10.331354829 TATA STEEL 8 1.369855 10 2 10.7397130 WIPRO 8 0.632783 10 2 9.2655666
ANALYSIS:
Table 4.6 indicates that the expected return of Dr. Reddy’s, CIPLA, WIPRO and HUL
have high returns when compared to others, while Tata motors, BHEL, ICICI Bank and
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Axis Bank have low return. The table indicates that Pharmaceutical, IT and FMCG
industries have high return. Banking sector have low return
Table 4.7 Expected Return for the period of 3year (Rm)
S.NO STOCKS Rf BETA Rm Rm - Rf E[Ri]
1 AXIS BANK 8 1.535544 6 -2 4.92891247
2 BAJAJ AUTO 8 0.737253 6 -2 6.52549429
3 BHEL 8 1.622856 6 -2 4.75428708
4 BHARATI AIRTEL 8 0.951411 6 -2 6.09717809
5 CIPLA 8 0.468113 6 -2 7.06377469
6 COAL INDIA 8 0.638861 6 -2 6.72227721
7 DR. REDDY's 8 0.440162 6 -2 7.11967668
8 GAIL (INDIA) 8 0.635025 6 -2 6.72995051
9 HDFC BANK 8 1.054323 6 -2 5.89135331
10 HDFC LTD. 8 1.075318 6 -2 5.849364063
11 HERO MOTOCORP 8 0.631688 6 -2 6.736623713
12 HINDALCO LTD. 8 1.451236 6 -2 5.097527295
13 HUL 8 0.476134 6 -2 7.047731284
14 ICICI 8 1.558988 6 -2 4.882023416
15 INFOSYS 8 0.805005 6 -2 6.389990107
16 ITC 8 0.682341 6 -2 6.6353181
17 L&T 8 1.27986 6 -2 5.440280672
18 M & M 8 0.925037 6 -2 6.149926674
19 MARUTHI SUZUKI 8 0.799259 6 -2 6.401482884
20 NTPC 8 0.726139 6 -2 6.547721159
21 ONGC 8 0.878868 6 -2 6.242263354
22 RIL 8 1.157202 6 -2 5.685595887
23 SBI 8 1.253038 6 -2 5.493923578
24 SESA STERLITE 8 1.298529 6 -2 5.40294225
25 SUN PHARMA. 8 0.596703 6 -2 6.806593647
26 TCS 8 0.737861 6 -2 6.524277766
27 TATA MOTORS 8 1.782513 6 -2 4.434973131
28 TATA POWER 8 1.165677 6 -2 5.66864522
29 TATA STEEL 8 1.369855 6 -2 5.260289986
30 WIPRO 8 0.632783 6 -2 6.734433395
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ANALYSIS:
Table 4.7 indicates that the expected return Dr. Reddy’s, CIPLA, Sun Pharmaceutical and
HUL are high not only during short term but also for the long term. Tata motors, BHEL,
ICICI Bank and Axis Bank have low return when compared to others. The table indicates
that Pharmaceutical, Automobile, IT and FMCG industries have high returns. Banking
sector have low return.
Figure 4.5 Comparison of 1yr, 2 yr and 3 yr Expected return of the shares
ANALYSIS:
Figure 4.5 indicates that the expected return Dr. Reddy’s, CIPLA, Sun Pharmaceutical
and HUL are high not only during short term but also for the long term. Tata motors,
BHEL, ICICI Bank and Axis Bank have low return when compared to others. The figure
indicates that Pharmaceutical, Automobile, IT and FMCG industries have high returns.
Banking sector have low return.
4.5 COMPARISON OF RETURN [Ri] AND EXPECTED RETURN
E[Ri]
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The Return and Expected returns are compared to find whether the equities are priced
appropriately or not. If the actual price is more than the expected price then the equity is
overpriced. If the actual price is less than the expected price then the equity is
underpriced. If both prices are equal then the equity is priced appropriately.
Table 4.8 Comparison of Ri & E(Ri) for 1 year (Rm)
S.NO STOCKS Ri E(Ri) PRICING
1 AXIS BANK 11.2759278 6.4644562 Under Priced
2 BAJAJ AUTO 5.54731026 7.2627471 Over Priced
3 BHEL 18.4933524 6.3771435 Under Priced
4 BHARATI AIRTEL 7.24356892 7.0485892 Appropriately Priced
5 CIPLA 3.616215 7.5318873 Over Priced
6 COAL INDIA 4.97537163 7.3611386 Over Priced
7 DR. REDDY’s 3.41035188 7.5598383 Over Priced
8 GAIL (INDIA) 4.81286529 7.3649753 Over Priced
9 HDFC BANK 14.0221211 6.9456767 Under Priced
10 HDFC LTD. 7.79751505 6.924682 Under Priced
11 HERO MOTOCORP 4.91336776 7.3683119 Over Priced
12 HINDALCO LTD. 10.8250485 6.5487636 Under Priced
13 HUL 3.78663628 7.5238656 Over Priced
14 ICICI 11.2031841 6.4410117 Under Priced
15 INFOSYS 6.21796063 7.1949951 Over Priced
16 ITC 5.09978368 7.317659 Over Priced
17 L&T 9.72572495 6.7201403 Under Priced
18 M & M 6.87471223 7.0749633 Appropriately Priced
19 MARUTHI SUZUKI 6.16559515 7.2007414 Over Priced
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20 NTPC 5.60266432 7.2738606 Over Priced
21 ONGC 6.60553396 7.1211317 Appropriately Priced
22 RIL 8.34338531 6.8427979 Under Priced
23 SBI 9.15849188 6.7469618 Under Priced
24 SESA STERLITE 9.89922056 6.7014711 Under Priced
25 SUN PHARMA. 5.72116797 7.4032968 Over Priced
26 TCS 5.62168735 7.2621389 Over Priced
27 TATA MOTORS 19.669233 6.2174866 Under Priced
28 TATA POWER 22.0841284 6.8343226 Under Priced
29 TATA STEEL 10.0714839 6.630145 Under Priced
30 WIPRO 4.92094649 7.3672167 Over Priced
Figure 4.6 Comparison of Ri & E(Ri) of 1 year(Rm)
ANALYSIS:
Figure 4.6 indicates that the Tata power, Tata Motors, BHEL have high difference in the
return and expected return in the list of Underpriced stocks as they generated high return
than they expected, while Dr. Reddy’s, CIPLA, WIPRO and HUL have high difference in
the return and expected return in the list of overpriced stocks, as they generated low
return when compared to others. Mahindra & Mahindra, Bharati Airtel and ONGC are the
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priced appropriately. Banking sectors shares are underpriced and IT sector shares are
overpriced.
Table 4.9 Comparison of Ri & E(Ri) for 2 year (Rm)
S.NO STOCKS Ri E(Ri) PRICING
1 AXIS BANK 15.88256 11.0710875 Under Priced
2 BAJAJ AUTO 7.759069 9.47450571 Over Priced
3 BHEL 23.36192 11.2457129 Under Priced
4 BHARATI AIRTEL 10.0978 9.90282159 Appropriately Priced
5 CIPLA 5.020553 8.9362253 Over Priced
6 COAL INDIA 6.891956 9.27772279 Over Priced
7 DR. REDDY's 4.730837 8.88032332 Over Priced
8 GAIL (INDIA) 6.71794 9.27004949 Over Priced
9 HDFC BANK 17.18509 10.1086467 Under Priced
10 HDFC LTD. 11.02347 10.1506359 Under Priced
11 HERO MOTOCORP 6.808432 9.26337629 Over Priced
12 HINDALCO LTD. 15.17876 10.9024727 Under Priced
13 HUL 5.215039 8.95226872 Over Priced
14 ICICI 15.88015 11.1179766 Under Priced
15 INFOSYS 8.632975 9.61000989 Over Priced
16 ITC 7.146807 9.3646819 Over Priced
17 L&T 13.5653 10.5597193 Under Priced
18 M & M 9.649822 9.85007333 Appropriately Priced
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19 MARUTHI SUZUKI 8.563371 9.59851712 Over Priced
20 NTPC 7.781083 9.45227884 Over Priced
21 ONGC 9.242139 9.75773665 Appropriately Priced
22 RIL 11.81499 10.3144041 Under Priced
23 SBI 12.91761 10.5060764 Under Priced
24 SESA STERLITE 13.79481 10.5970578 Under Priced
25 SUN PHARMA. 7.511278 9.19340635 Over Priced
26 TCS 7.835271 9.47572223 Over Priced
27 TATA MOTORS 25.01677 11.5650269 Under Priced
28 TATA POWER 25.58116 10.3313548 Under Priced
29 TATA STEEL 14.18105 10.73971 Under Priced
30 WIPRO 6.819296 8.0048 Over Priced
Figure 4.7 Comparison of Ri & E(Ri) of 2 years (Rm)
ANALYSIS:
Figure 4.7 indicates that the Tata power, Tata Motors, BHEL have high difference in the
return and expected return in the list of Underpriced stocks as they generated high return
than they expected, while Dr. Reddy’s, CIPLA, WIPRO and HUL have high difference in
the return and expected return in the list of overpriced stocks, as they generated low
return when compared to others. Mahindra & Mahindra, Bharati Airtel and ONGC are the
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priced appropriately. Banking sectors shares are underpriced and IT sector shares are
overpriced.
Table 4.10 Comparison of Ri & E(Ri) for 3 year (Rm)
S.NO STOCKS Ri E(Ri) PRICING
1 AXIS BANK 9.740384 4.92891247 Under Priced
2 BAJAJ AUTO 4.810057 6.52549429 Over Priced
3 BHEL 16.8705 4.75428708 Under Priced
4 BHARATI AIRTEL 6.292158 6.09717809 Appropriately Priced
5 CIPLA 3.148102 7.06377469 Over Priced6 COAL INDIA 4.33651 6.72227721 Over Priced7 DR. REDDY's 2.97019 7.11967668 Over Priced8 GAIL (INDIA) 4.177841 6.72995051 Over Priced9 HDFC BANK 12.9678 5.89135331 Under Priced
10 HDFC LTD. 6.722197 5.849364063 Under Priced11 HERO MOTOCORP 4.28168 6.736623713 Over Priced
12 HINDALCO LTD. 9.373812 5.097527295 Under Priced
13 HUL 3.310502 7.047731284 Over Priced
14 ICICI 9.644196 4.882023416 Under Priced
15 INFOSYS 5.412956 6.389990107 Over Priced16 ITC 4.417443 6.6353181 Over Priced17 L&T 8.445865 5.440280672 Under Priced
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18 M & M 5.949676 6.149926674 Appropriately Priced
19 MARUTHI SUZUKI 5.366337 6.401482884 Over Priced20 NTPC 4.876525 6.547721159 Over Priced21 ONGC 5.726666 6.242263354 Appropriately Priced
22 RIL 7.186183 5.685595887 Under Priced23 SBI 7.905454 5.493923578 Under Priced24 SESA STERLITE 8.600692 5.40294225 Under Priced25 SUN PHARMA. 5.124465 6.806593647 Over Priced26 TCS 4.883826 6.524277766 Over Priced27 TATA MOTORS 17.88672 4.434973131 Under Priced28 TATA POWER 20.91845 5.66864522 Under Priced29 TATA STEEL 8.701629 5.260289986 Under Priced30 WIPRO 4.288163 6.734433395 Over Priced
Figure 4.8 Comparison of Ri & E(Ri) of 3 year( Rm)
ANALYSIS:
Figure 4.8 indicates that the Tata power, Tata Motors, BHEL and HDFC Bank have the
high difference between the return and expected return in the list of Underpriced stocks as
they generated high return than they expected, while Dr. Reddy’s, CIPLA and HUL have
the high difference in the return and expected return in the list of overpriced stock, as they
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generated low return when compared to others. Mahindra & Mahindra, Bharati Airtel and
ONGC are the priced appropriately. Banking sectors, Infrastructure and Manufacturing
Industries shares are underpriced. IT and Automobile sector shares are overpriced.
4.6 HYPOTHESIS
Hypothesis testing (Z-test) is conducted using MS- EXCEL, Z-test is a statistical test used
in interference which determines if the difference between a sample mean and population
mean is large enough to be statistically significant. In order for the Z-test to be reliable
certain conditions must be met. The most important is that since the Z-test uses the
population mean and population standard deviations, must be known. Testing is
conducted to check whether the slope of Beta varies significantly from Zero or not, with
the help of values of Beta () and Expected return (E(Ri)). Variance is also calculated for
Beta and Expected return values which is used in Z-test. Mean difference is kept at Zero.
H0 (NULL HYPOTHESIS): Slope of BETA is not significantly different from Zero
H1 (ALTERNATE HYPOTHESIS): Slope of BETA is significantly different from Zero
Table 4.11 Variance of Beta & E(Ri) of 1 year (Rm)
S.NO STOCKS BETA E(Ri)
1 AXIS BANK 1.535544 6.4644562
2 BAJAJ AUTO 0.737253 7.2627471
3 BHEL 1.622856 6.3771435
4 BHARATI AIRTEL 0.951411 7.0485892
5 CIPLA 0.468113 7.5318873
6 COAL INDIA 0.638861 7.3611386
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
7 DR. REDDY's LABORATRIES 0.440162 7.5598383
8 GAIL (INDIA) 0.635025 7.3649753
9 HDFC BANK 1.054323 6.9456767
10 HDFC LTD. 1.075318 6.924682
11 HERO MOTOCORP 0.631688 7.3683119
12 HINDALCO LTD. 1.451236 6.5487636
13 HUL 0.476134 7.5238656
14 ICICI 1.558988 6.4410117
15 INFOSYS 0.805005 7.1949951
16 ITC 0.682341 7.317659
17 L&T 1.27986 6.7201403
18 MAHINDRA & MAHINDRA 0.925037 7.0749633
19 MARUTHI SUZUKI 0.799259 7.2007414
20 NTPC 0.726139 7.2738606
21 ONGC 0.878868 7.1211317
22 RIL 1.157202 6.8427979
23 SBI 1.253038 6.7469618
24 SESA STERLITE 1.298529 6.7014711
25 SUN PHARMACEUTICALS 0.596703 7.4032968
26 TCS 0.737861 7.2621389
27 TATA MOTORS 1.782513 6.2174866
28 TATA POWER 1.165677 6.8343226
29 TATA STEEL 1.369855 6.630145
30 WIPRO 0.632783 7.3672167
VARIANCE 0.144864 0.14486386
Table 4.12 Z-Test for Beta & E(Ri) of 1 year (Rm)
z-Test: Two Sample for Means
Variable 1 Variable 2
Mean 0.978919 7.021081
Known Variance 0.144864 0.144864
Observations 30 30
Hypothesized Mean Difference 0
Z -61.4834
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
P(Z<=z) one-tail 0
z Critical one-tail 1.644854
P(Z<=z) two-tail 0
z Critical two-tail 1.959964
ANALYSIS:
Table 4.12, the calculated Z value (Z= -61.4834) is lesser than the critical value of Z, the
critical value of Z should lies between -3 and +3. Therefore, according to Z-test H0 is
rejected and H1 is accepted. Hence the slope of BETA is significantly different from zero.
CHAPTER- 5
SUMMARY OF FINDINGS
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
FINDINGS
Based on the study conducted on “Capital Asset Pricing Model (CAPM) - A Study on
Indian Stock Markets”, the following findings are made.
The Capital Assets Pricing Model describes the relationship between risk and
expected return and is used in the pricing of risky securities.
Regression analysis was applied to the select date based on which Beta, Alpha and
Residual values were found. Alpha is the return in excess of the compensation for the
risk borne. Hindustan Unilever Ltd has high Alpha factor (0.03984) indicating good
return and Tata Power has the lowest (-0.16885) indicating low returns.
Analysis of Beta value which is a measure of market risk shows that Tata Motors has
the highest beta factor (1.782513) and Dr. Reddy’s Laboratories has the lowest of beta
factor (0.440162).
Residuals are the unexplained deviations and the Tata Power has the highest residual
value (14.09323) where as Reliance Industries Ltd. has the lowest residual value
(0.258779).
The returns calculated for one year, two years and three years period shows that Tata
Power, Tata Motors and BHEL have shown superior performance in the market.
Whereas Dr. Reddys, CIPLA and HUL have given the lowest returns for all the one
year, two years and three years periods as compared to others.
Pharmaceutical, Automobile, IT and FMCG industries have generated lower returns
due to recession.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
Banking and Infrastructure industries have done considerably well in the market.
Tata group stocks have done exceptionally well in the market compared all others.
Based on the calculation of expected return, Dr. Reddy’s, CIPLA, WIPRO and HUL
have high expected returns while Tata motors, BHEL, ICICI Bank and Axis Bank
have low returns.
Pharmaceutical, IT and FMCG industries have high expected returns where as
banking sector has the low return due to low risk.
Tata power, Tata Motors, BHEL have given higher returns than the expected return
indicating that these are the underpriced securities.
Dr. Reddy’s, CIPLA, WIPRO and HUL have given low returns as compared to the
expected return representing that these are overpriced securities.
The returns generated by Mahindra & Mahindra, Bharati Airtel and ONGC are almost
equal to expected return and hence it shows that these securities have been priced
appropriately.
Overall banking sectors shares are underpriced and IT sector shares are overpriced.
The results of hypothesis to check whether the slope of Beta varies significantly from
Zero or not, reveal that the slope of BETA is significantly different from zero.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CHAPTER- 6
CONCLUSION AND SUGGESTIONS
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
CONCLUSION
The Capital Asset Pricing Model introduced that the expected return of a security or a
portfolio equals the rate of return on a risk-free rate plus a risk premium. This model
offers a simple tool for investors to evaluate their investments. If the expected return does
not meet or beat the required return, then the investment is not worthwhile to take it up.
Though some studies have raised doubts about CAPM's validity, the model is still widely
used in the investment community. While it is difficult to predict from beta how
individual stocks might react to particular movements, investors can probably safely
assume that a portfolio of high-beta stocks will move more than the market in either
direction, or a portfolio of low-beta stocks will move less than the market. CAPM helps
to benchmark the rate of return for evaluating possible investments and helps the
Investors to customize portfolio to their specific risk-return requirements.
The Present study on “Capital Asset Pricing Model - A Study on Indian Stock Markets”
an attempt has been made to analyse the performance of stocks on BSE SENSEX with
regard to risk and return. The CAPM theory is used to identify the securities that are
overpriced or underpriced through the difference in return and expected return. The study
shows high degree of relevance of CAPM in calculation of required rate of return in
Indian stock market. Therefore, investors can integrate the performance of their portfolio
to the market developments, investors can opt for risky securities to get high returns, and
investors can establish trade-off between their risks and return preferences by applying
the CAPM. This model helps the Investors to customize portfolio to their specific risk-
return requirements, aiming to hold securities with betas in excess of 1 while the market
is rising, and securities with betas of less than 1 when the market is falling.
The analysis of data has shown that Tata power, Tata Motors, BHEL have given higher
returns than the expected return indicating that these are the underpriced securities. Dr.
Reddy’s, CIPLA, WIPRO and HUL have given low returns as compared to the expected
return representing that these are overpriced securities. The returns generated by
Mahindra & Mahindra, Bharati Airtel and ONGC are almost equal to expected return and
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
hence it shows that these securities have been priced appropriately. Overall banking
sectors shares are underpriced and IT sector shares are overpriced.
SUGGESTIONS
In the present research work an attempt is made to under the CAPM theory and the
application of this theory to Indian stock markets with special reference to BSE Sensex.
Based on the thorough analysis of data collected for a period three years, the following
suggestions are made:
The CAPM introduced that the expected return of a security or a portfolio equals the
rate of return on a risk-free rate plus a risk premium. This model offers a simple tool
for investors to evaluate their investments. If this expected return does not meet or
beat the required return, then the investment is not worthwhile to take it up.
Though some studies have raised doubts about CAPM's validity, the model is still
widely used in the investment community. Although it is difficult to predict from beta
how individual stocks might react to particular movements, investors can probably
safely assume that a portfolio of high-beta stocks will move more than the market in
either direction, or a portfolio of low-beta stocks will move less than the market.
This model helps the Investors to customize portfolio to their specific risk-return
requirements, aiming to hold securities with betas in excess of 1 while the market is
rising, and securities with betas of less than 1 when the market is falling.
Beta a measure of the non-diversifiable risk in a portfolio is most important for
investors, from the point of view CAPM theory. Investors will choose a mix between
risk-free rate and the market portfolio based on his utility function.
This model helps to benchmark the rate of return for evaluating possible investments.
For example, if we are analyzing securities, we might be interested in whether the
expected return we forecast for a stock is more or less than its “fair” return given its
risk.
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
By applying the CAPM theory we can identify the Underpriced/overpriced securities
and this helps investors in great deal to select the securities that have performed really
well to make good profits.
BIBLOGRAPHY & ANNEXURES
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CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets
BIBLOGRAPHY
I. RESEARCH PAPERS
[1] Sudarsana. G. Reddy (2011), Testing the capital asset pricing model (CAPM) – A
study of Indian stock market, International Journal Of Research In Commerce,
Economics & Management ,Vol. 1, Issue 3, ISSN 2231-4245, 40-46.
[2] Kapil Choudhary and Sakshi Choudhary (2010), Testing Capital Asset Pricing
Model: Empirical Evidences From Indian Equity Market, Eurasian Journal of Business
and Economics 2010, 3 (6), 127-138.
[3] Sylvester Jarlee (2007), A Test of the Capital Asset Pricing Model: Studying Stocks
on the Stockholm Stock Exchange, Bachelor Thesis In Economics, Västerås, Sweden.
[4] Peter Bossaerts, Daniel Kleiman and Charles Plott (2009), Price Discovery In
Financial Markets: The Case Of The CAPM, California Institute of technology, 1-45.
II. WEBSITES
[5]http://en.wikipedia.org/
[6] http://www.investopedia.com/terms/p/portfolio.asp
[7] http://www.bseindia.com/markets/equity/EQReports
[8] http://www.investopedia.com/terms/r/risk-freerate.asp
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