JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW                    Analysis of Risk and Return                           (Assign...
ACKNOWLEDGEMENTWe are grateful to our respected instructor Dr. Saima Rizvi for giving us an opportunity tounderstand the f...
CONTENTSINTRODUCTION ........................................................................................................
INTRODUCTIONRisk and ReturnThe project assigned to us is the analysis of Risk and Return of FMCG companies. Both risk andr...
But systematic can’t be removed though it can be minimized. Interest rates, recession and warsall represent sources of sys...
Colgate Palmolive               Company        Market     Apr-10      10.48            0.18     May-10         2.28       ...
decrease in the market index then the stock may not apparently move along with market. It isgood for risk-averse investors...
Dabur India Ltd.               Company       Market                                                                       ...
INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sh...
Godrej Consumer Products Ltd.                   Company       Market        Apr-10       11.47        0.18                ...
that of the market (BSE SENSEX). Here the β of Godrej Consumer Product Ltd. is less than 1that implies that the stock of t...
Hindustan Unilever Ltd.                         Company         Market           Apr-10           0.13          0.18      ...
INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sh...
ITC Ltd.                   Company          Market    Apr-10           0.72             0.18                              ...
INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sh...
Here we can compare the Beta of all the five companies. All of them are havingBeta values less than or more than 1. It mea...
Among all the companies, Hindustan Unilever Ltd. has High Beta and highest Avg.Returns is of Godrej Consumer Ltd. So the p...
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  1. 1. JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW Analysis of Risk and Return (Assignment) Sector: FMCG IndustrySubmitted To: Dr. Saima Rizwi Submitted By: Feroz Ahmad (JIML-11-057) Bhola Bhakta (JIML-11-FS-021) Kushal Bhardwaj (JIML-11-075) Gaurav Saraswat (JIML-11-060) Bhagwati Prasad Gupta (JIML-11-044)DATE: January 10, 2012 1
  2. 2. ACKNOWLEDGEMENTWe are grateful to our respected instructor Dr. Saima Rizvi for giving us an opportunity tounderstand the financial analysis of FMCG Industry. Through this project we came to learn thathow to look at the problem from a Manager’s perspective.We would like to present our gratitude to Saima Mam for the successful completion of theproject which would not have been possible without his continuous help and guidance. 2
  3. 3. CONTENTSINTRODUCTION ................................................................................................................................ 4COLGATE PALOMOLIVE ...................................................................Error! Bookmark not defined.DABUR INDIA LTD. ...........................................................................Error! Bookmark not defined.GODREJ CONSUMER PRODUCTS LTD ................................................Error! Bookmark not defined.HINDUSTAN UNILEVER LTD .............................................................Error! Bookmark not defined.ITC LTD ...........................................................................................Error! Bookmark not defined.COMPARISON AMONG BETA 5 COMPANIES ……………………………………………………………………………………….14Risk & Return Of The Companies …………………………………………….………..16-17 3
  4. 4. INTRODUCTIONRisk and ReturnThe project assigned to us is the analysis of Risk and Return of FMCG companies. Both risk andreturn go side by side, it becomes very important for an investor to consider both risk and return.The decision of an investor whether to invest or not is greatly influenced by the return given bythat particular company and the risk associated.We took five different FMCG companies’ return as a component of FMCG sector. Market returnhas also been considered as benchmark. Excel has been used for the calculations. We have usedfunctions like descriptive statistics, regression and charts.Risk and return has been calculated, analyzed and interpreted on the basis of last 12 monthsreturn (From April 2010 to March 2011). Firstly mean return of the companies has beencalculated then with the help of descriptive statistics standard deviation “risk” has beencalculated. It shows the amount of deviation of actual return from thee mean return. Thesensitivity (BETA) has been calculated with the help of regression.The following companies have been taken: Colgate Palmolive Dabur India Ltd. Hindustan Unilever Ltd. Godrej Consumer Products Ltd. ITC Ltd.Measurement RiskFinancial Management develops the concept of total risk as,Total risk = Systematic risk + Unsystematic riskUnsystematic risk is the company or industry specific risk that is inherent in each investment. Itcan be removed. 4
  5. 5. But systematic can’t be removed though it can be minimized. Interest rates, recession and warsall represent sources of systematic risk because they affect the entire market and can’t beavoided through diversification.Beta (β) is used to define the systematic risk of a stock.Beta measures a stocks volatility, the degree to which its price or return fluctuates in relationto the overall market. In other words, it gives a sense of the stocks market risk compared to thegreater market. Beta is used also to compare a stocks market risk to that of other stocks.This measure is calculated using regression analysis.A beta of 1 indicates that the securitys price tends to move with the market.A beta greater than 1 indicates that the securitys price tends to be more volatile than themarket.A beta less than 1 but greater than 0 means it tends to be less volatile than the market. 5
  6. 6. Colgate Palmolive Company Market Apr-10 10.48 0.18 May-10 2.28 -3.5 Colgate Palmolive Vs BSE Jun-10 10.7 4.46 Sensex Returns Jul-10 0.29 0.95 y = 0.457x + 1.375 15 Aug-10 -0.79 0.58 R² = 0.263 Colgate Palmolive ltd Return 10 Sep-10 5.77 11.67 Colgate Palmolive Oct-10 -0.66 0.38 5 Vs BSE Sensex Return Nov-10 0.74 -2.55 0 Linear (Colgate Dec-10 -0.97 3.32 -20 -10 0 10 20 Palmolive Vs BSE -5 Jan-11 -5.08 -10.64 Sensex Return) Feb-11 -2.78 -3.11 -10 Mar-11 -0.2 5.41 BSE Sensex Return Standard Companys Reqd. Companys Company Name Beta Beta Avg. Return Return Alpha StatusColgate-Palmolive - (India) Ltd. 1 0.457251762 1.64833333 4.8695234 3.22119009 Overpriced The above graph has been derived by plotting monthly returns of Colgate Palmolive with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Colgate Palmolive is the slope of this characteristics line. BETA (β) Beta (β) is used to measure the systematic risk of a security. Colgate Palmolive has a β of 0.457251762 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Colgate Palmolive are less volatile than that of the market (BSE SENSEX). Here the β of Colgate Palmolive is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or 6
  7. 7. decrease in the market index then the stock may not apparently move along with market. It isgood for risk-averse investors, who do want to take high risk.INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sharpe ratio. The intercept Colgate Palmolive is 1.3758. It means Colgate Palmolive haspositive 1.37% return when the market return is zero for the extra risk. Here the alpha is positivethat shows the stock is being traded at underpriced, which is a good option for investors to investin the stock to get better return in future.COEFFICIENT OF CORRELATIONThe coefficient of correlation is 0.512. The positive correlation indicates that when the marketreturn goes up, Colgate Palmolive’s return also goes up.COEFFICIENT OF DETERMINATIONThe squared coefficient of correlation or the coefficient of determination is 0.263 or 26.3%. Itindicates the percentage of the variance of Colgate Palmolive’s returns, explained by the changesin the market returns. The 73.7% unexplained variance is the firm-specific variance. 7
  8. 8. Dabur India Ltd. Company Market Dabur India Ltd. Vs BSE Apr-10 13.75 0.18 May-10 2.47 -3.5 Sensex Returns + 2.027 y = 0.326x Jun-10 13.47 4.46 15 R² = 0.055 Dabur India Ltd. Returns Jul-10 -5.79 0.95 10 Dabur India Aug-10 6.65 0.58 Ltd. Vs BSE 5 Sensex Returns Sep-10 2.63 11.67 Oct-10 -5.32 0.38 0 Nov-10 -5.6 -2.55 -20 -10 -5 0 10 20 Linear (Dabur India Ltd. Vs Dec-10 5.19 3.32 -10 BSE Sensex Jan-11 -6.28 -10.64 Returns) Feb-11 9.82 -3.11 BSE Sensex Returns Mar-11 -4.33 5.41 Standard Companys Avg. Reqd. CompanysCompany Name Beta Beta Return Return Alpha StatusDabur India Ltd. 1 0.326448734 2.22166667 5.8994883 -3.6778216 Overpriced The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Dabur India Ltd. is the slope of this characteristics line. BETA (β) Beta (β) is used to measure the systematic risk of a security. Dabur India Ltd. has a β of 0.326 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Dabur India Ltd. are less volatile than that of the market (BSE SENSEX). Here the β of Dabur India Ltd. is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or decrease in the market index then the stock may not apparently move along with market. It is good for risk-averse investors, who do want to take high risk. 8
  9. 9. INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sharpe ratio. The intercept Dabur India Ltd. is 2.027. It means Dabur India Ltd. has positive2.027% return when the market return is zero for the extra risk. Here the alpha is positive thatshows the stock is being traded at underpriced, which is a good option for investors to invest inthe stock to get better return in future.COEFFICIENT OF CORRELATIONThe coefficient of correlation is 0.2356. The positive correlation indicates that when the marketreturn goes up, Dabur India Ltd.’s return also goes up.COEFFICIENT OF DETERMINATIONThe squared coefficient of correlation or the coefficient of determination is 0.0555 or 5.55%. Itindicates the percentage of the variance of Dabur India Ltd.’s returns, explained by the changesin the market returns. The 94.45% unexplained variance is the firm-specific variance.The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respectto the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 toMarch 2011. Here, the total no. of observations is 12.The characteristics line has also beendrawn. The Beta of Dabur India Ltd. is the slope of this characteristics line. 9
  10. 10. Godrej Consumer Products Ltd. Company Market Apr-10 11.47 0.18 Godrej Consumer Products May-10 11.29 -3.5 Ltd. Vs BSE Sensex Returns Godrej Consumer Products Ltd. Returns Jun-10 6.66 4.46 15 y = 0.351x + 2.275 R² = 0.086 Jul-10 0.2 0.95 10 Aug-10 8.12 0.58 Godrej Consumer Sep-10 8.55 11.67 5 Products Ltd. Oct-10 2.73 0.38 Vs BSE Sensex 0 Nov-10 -2.34 -2.55 Returns -20 -10 0 10 20 Linear (Godrej Dec-10 -7.18 3.32 -5 Consumer Jan-11 -3.74 -10.64 Products Ltd. -10 Vs BSE Sensex Feb-11 -5.6 -3.11 Returns) BSE Sensex returns Mar-11 -0.34 5.41 Standard Avg. CompanysCompany Name Beta Companys Beta Return Reqd. Return Alpha Status Godrej Consumer Products Ltd. 1 0.351176474 2.485 5.7047779 -3.21977791 Overpriced The above graph has been derived by plotting monthly returns of Godrej Consumer Product Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Godrej Consumer Product Ltd. is the slope of this characteristics line. BETA (β) Beta (β) is used to measure the systematic risk of a security. Godrej Consumer Product Ltd. has a β of 0.3511 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Godrej Consumer Product Ltd. are less volatile than 10
  11. 11. that of the market (BSE SENSEX). Here the β of Godrej Consumer Product Ltd. is less than 1that implies that the stock of the company is a defensive stock which would not be marketoriented. If there is increase or decrease in the market index then the stock may not apparentlymove along with market. It is good for risk-averse investors, who do want to take high risk.INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sharpe ratio. The intercept Godrej Consumer Product Ltd. is 2.2757. It means the companyhas positive 2.27% return when the market return is zero for the extra risk. Here the alpha ispositive that shows the stock is being traded at underpriced, which is a good option for investorsto invest in the stock to get better return in future.COEFFICIENT OF CORRELATIONThe coefficient of correlation is 0.2339. The positive correlation indicates that when the marketreturn goes up, Godrej Consumer Product Ltd.’s return also goes up.COEFFICIENT OF DETERMINATIONThe squared coefficient of correlation or the coefficient of determination is 0.0864 or 8.64%. Itindicates the percentage of the variance of Godrej Consumer Product Ltd.’s returns, explained bythe changes in the market returns. The 91.36% unexplained variance is the firm-specificvariance. 11
  12. 12. Hindustan Unilever Ltd. Company Market Apr-10 0.13 0.18 Hindustan Unilever Ltd. Vs May-10 -0.94 -3.5 BSE Sensex Returns Jun-10 12.73 4.46 20 y = 1.108x + 1.222 R² = 0.608 Hindustan Unilever Ltd. returns Jul-10 -4.68 0.95 15 Aug-10 5.3 0.58 Hindustan 10 Sep-10 16.49 11.67 Unilever Ltd. Vs 5 BSE Sensex Oct-10 -3.79 0.38 Returns 0 Nov-10 2.67 -2.55 Linear -20 -10 -5 0 10 20 Dec-10 5.08 3.32 (Hindustan Jan-11 -13.18 -10.64 -10 Unilever Ltd. Vs -15 BSE Sensex Feb-11 3.54 -3.11 Returns ) Mar-11 -0.75 5.41 BSE Sensex Returns Avg. Reqd. Companys Company Name Standard Beta Companys Beta Return Return Alpha StatusHindustan Unilever - Ltd. 1 1.10834855 1.88333333 0.2573212 2.140654545 Underpriced The above graph has been derived by plotting monthly returns of Hindustan Unilever Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Hindustan Unilever Ltd. is the slope of this characteristics line. BETA (β) Beta (β) is used to measure the systematic risk of a security. Hindustan Unilever Ltd. has a β of 1.108 based on the monthly returns during April 2010 to March 2011. A Beta of greater than 1 means that returns of Hindustan Unilever Ltd. is more volatile than that of the market (BSE SENSEX). Here the β of Hindustan Unilever Ltd. is greater than 1 that implies that the stock of the company is a aggressive stock which would be market oriented. If there is increase or decrease in the market index then the stock would apparently move along with the market. It is not good for risk-averse investors, who do want to take high risk but for risk takers who want to invest in these securities with the hope of getting risk premium for the additional amount of risk. 12
  13. 13. INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sharpe ratio. The intercept Hindustan Unilever Ltd. is 1.223. It means the company haspositive 1.22% return when the market return is zero for the extra risk. Here the alpha is positivethat shows the stock is being traded at underpriced, which is a good option for investors to investin the stock to get better return in future.COEFFICIENT OF CORRELATIONThe coefficient of correlation is 0.7802. The positive correlation indicates that when the marketreturn goes up, Hindustan Unilever Ltd.’s return also goes up.COEFFICIENT OF DETERMINATIONThe squared coefficient of correlation or the coefficient of determination is 0.6087 or 60.87%. Itindicates the percentage of the variance of Hindustan Unilever Ltd.’s returns, explained by thechanges in the market returns. The 39.13% unexplained variance is the firm-specific variance. 13
  14. 14. ITC Ltd. Company Market Apr-10 0.72 0.18 ITC Ltd. Vs. BSE Sensex May-10 6.83 -3.5 Returns Jun-10 11.51 4.46 15 y = 0.661x + 2.424 Jul-10 1.31 0.95 R² = 0.534 ITC Ltd. Returns 10 Aug-10 5.36 0.58 Sep-10 9.47 11.67 5 ITC Ltd. Vs. Oct-10 -1.44 0.38 BSE Sensex 0 Returns Nov-10 -0.09 -2.55 -20 -10 0 10 20 Dec-10 1.78 3.32 -5 Linear (ITC Jan-11 -6.62 -10.64 Ltd. Vs. BSE Feb-11 0.42 -3.11 -10 Sensex BSE Sensex Returns Returns) Mar-11 4.58 5.41 Standard Companys Avg. Reqd. CompanysCompany Name Beta Beta Return Return Alpha Status I T C Ltd. 1 0.6616846 2.81916667 0.3942537 2.424912946 UnderpricedThe above graph has been derived by plotting monthly returns of ITC Ltd. with respect to themonthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. TheBeta of ITC Ltd. is the slope of this characteristics line.BETA (β)Beta (β) is used to measure the systematic risk of a security. ITC Ltd. has a β of 0.6617 based onthe monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0means that returns of ITC Ltd. are less volatile than that of the market (BSE SENSEX). Here theβ of ITC Ltd. is less than 1 that implies that the stock of the company is a defensive stock whichwould not be market oriented. If there is increase or decrease in the market index then the stockmay not apparently move along with market. It is good for risk-averse investors, who do want totake high risk. 14
  15. 15. INTERCEPT (ALPHA)Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, andthe Sharpe ratio. The intercept ITC Ltd. is 2.4249. It means the company has positive 2.42%return when the market return is zero for the extra risk. Here the alpha is positive that shows thestock is being traded at underpriced, which is a good option for investors to invest in the stock toget better return in future.COEFFICIENT OF CORRELATIONThe coefficient of correlation is 0.7309. The positive correlation indicates that when the marketreturn goes up, ITC Ltd.’s return also goes up.COEFFICIENT OF DETERMINATIONThe squared coefficient of correlation or the coefficient of determination is 0.5343 or 53.43%. Itindicates the percentage of the variance of ITC Ltd.’s returns, explained by the changes in themarket returns. The 46.57% unexplained variance is the firm-specific variance.COMPARISON AMONG BETA 5 COMPANIES Companies Beta Colgate Palmolive Ltd. 0.47 Dabur India Ltd. 0.32 Godrej Consumer Products Ltd. 0.35 Hindustan Unilever Ltd. 1.1 ITC Ltd. 0.66 15
  16. 16. Here we can compare the Beta of all the five companies. All of them are havingBeta values less than or more than 1. It means all the companies have returnsthose are less or more volatile than the market returns.Since the index is same for all the companies, the company having lowest β ismost risk free among them. Here, Asian Paints has the minimum risk among allthe companies.RISK & RETURN OF THE COMPANIESAVG. YEARLY RETURN OF COMPANIES Returns BetaColgate Palmolive Ltd. 1.64 0.47Dabur India Ltd. 2.22 0.32Godrej Consumer Ltd. 2.48 0.35Hindustan Unilever Ltd. 1.88 1.1ITC Ltd. 2.81 0.66 3 2.5 2 1.5 1 0.5 Risk 0 Return 16
  17. 17. Among all the companies, Hindustan Unilever Ltd. has High Beta and highest Avg.Returns is of Godrej Consumer Ltd. So the profile of Dabur India Ltd. is mostattractive for risk-averse but Hindustan Unilever Ltd. has the most attractiveprofile for risk takers investors. Again ITC Ltd. is the second best profile for risktakers because of high beta but Dabur India Ltd. is second best for risk-averseinvestors because of a low beta. 17

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