A study on empherical testing of capital asset pricing model


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Study on empherical testing of capital asset pricing model

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A study on empherical testing of capital asset pricing model

  1. 1. “EMPHERICAL TESTING OF CAPM” “A STUDY ON EMPHERICAL TESTING OF CAPITAL ASSET PRICING MODEL ” (Conducted at Asit C. Mehta Investment Intermediates Ltd, Hassan) Project report Submitted to the University of Mysore, Mysore. In partial fulfillment of the requirement for the award of the Degree in Master of Business Administration. by SHABRIN TAJ ASMA Reg.No.08MB3746 Guide Mr. Subramanya P R HARANAHALLI RAMASWAMY INSTITUTE OF HIGHER EDUCATION, HASSAN 2008-10 HRIHE, HASSAN Page 1
  2. 2. “EMPHERICAL TESTING OF CAPM” DECLARATION I hereby declare that this project report entitled “A STUDY ON EMPHERICAL TESTING OF CAPITAL ASSET PRICING MODEL” AT ASIT C MEHTA INVESTMENT INTERMEDIATES LTD, HASSAN” has been prepared by me under the guidance of Mr. P.K. Subramanya Lecturer, Department of Business Administration, Haranahalli Ramaswamy Institute of Higher Education, Hassan. I further declare that this project report is prepared from the information collected from the ASIT C MEHTA INVESTMENT INTERMEDIATES LTD and that the same is purely for academic purpose and that the report has not been submitted to any other institution of higher learning for the award of any degree, diploma or other similar title. Date: SHABRIN TAJ ASMA Place: Hassan Reg. No. 08MB3746 HRIHE, HASSAN Page 2
  3. 3. “EMPHERICAL TESTING OF CAPM” ACKNOWLEDGEMENT I, express my deep sense of gratitude and sincere thanks to, Mr. Santhish P Unit manager of Asit C. Mehta Investment and Interrmediates Ltd, Hassan, who gave me an opportunity to conduct this Research Project. I state with great pleasure this report would not have been possible without the wonderful help from various quarters, the list of which is quite too long. I will take this opportunity to express my deep sense of gratitude to Dr. S R Jayaram, Administrator, HRIHE Hassan for his continuous encouragement at every stage of the Project. I will take this opportunity to express my deep sense of gratitude to Mr. Subramanya P.R, Lecturer, HRIHE, Hassan for his guidance, continuous encouragement and valuable suggestions at every stage of the Project. I would also like to extend my deep sense of gratitude to my parents and all my family members, friends, who have directly or indirectly supported and helped me in the completion of my project successfully Last, but not the least I would like to extend my thanks to all the unseen hands that have made this project possible. Date: SHABRIN TAJ ASMA Place: Hassan Reg.No.08MB3746 HRIHE, HASSAN Page 3
  4. 4. “EMPHERICAL TESTING OF CAPM” CONTENTS Sl. No Particulars Page.No Executive Summary Chapter - 1 INTRODUCTION 1.01 Statement of the Problem 1.02 Objective of Study 1.03 Scope of the Study 1.04 Methodology 1.05 Limitations of Study Chapter - 2 REVIEW OF LITERATURE Chapter - 3 COMPANY AND INDUSTRY PROFILE 3.01 Industry Profile 3.02 Company Profile 3.03 Organization Structure 3.04 Achievements 3.05 SWOT Analysis Chapter - 4 DATA COLLECTION AND INTERPRETATION Chapter - 5 SUMMARY OF FINDINS, SUGGESSIONS AND CONCLUSION BIBLIOGRAPHY HRIHE, HASSAN Page 4
  5. 5. “EMPHERICAL TESTING OF CAPM” LIST OF TABLES Sl. No Particulars Page. No Market Return of Nifty 4.01 For the year- 2005 4.02 For the year- 2006 4.03 For the year- 2007 4.04 For the year- 2008 4.05 For the year- 2009 4.06 Market Return Wipro Technology Limited 4.07 For the year- 2005 4.08 For the year- 2006 4.09 For the year- 2007 4.10 For the year- 2008 4.11 For the year- 2009 Infosys Technology Limited 4.12 For the year- 2005 4.13 For the year- 2006 4.14 For the year- 2007 4.15 For the year- 2008 4.16 For the year- 2009 HCL Technology Limited 4.17 For the year- 2005 4.18 For the year- 2006 4.19 For the year- 2007 4.20 For the year- 2008 4.21 For the year- 2009 Tata Consultancy Service Limited 4.22 For the year- 2005 4.23 For the year- 2006 4.24 For the year- 2007 HRIHE, HASSAN Page 5
  6. 6. “EMPHERICAL TESTING OF CAPM” 4.25 For the year- 2008 4.26 For the year- 2009 LIST OF GRAPHS Sl.No Particulars Page. No 4.01 Wipro Technology limited 4.02. Infosys Technology limited 4.03 HCL Technology Limited 4.04 Tata Consultancy Services Limited HRIHE, HASSAN Page 6
  7. 7. “EMPHERICAL TESTING OF CAPM” CHAPTER – 1 INTRODUCTION 1.1 EXECUTIVE SUMMARY: 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 after the assumption that investors are risk-averse. This implies that investors hold well diversified portfolio HRIHE, HASSAN Page 7
  8. 8. “EMPHERICAL TESTING OF CAPM” instead of investing their entire wealth in a single or a few assets. One important conclusion of the portfolio theory is that if the investor of the portfolio theory is that if the investor holds a well-diversified portfolio of assets then their concerns should 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. Further, we can extend the portfolio theory to derive a framework for valuing risk assets. This framework is referred to as CAPM. The CAPM is a model that provides a framework to determine the required rate of return on an asset and indicates the relationship between return and risk of the asset. The required rate of return specified by CAPM help in valuing an asset. Once can also compare the expected return and determine whether the asset is fairly valued. As we exemplifies the relationship between an asset’s required rate of return. Risk is of many kinds, they can be classified as systematic or unsystematic risk. Systematic risk covers the risks of market, interest rate risk and purchasing power risk and unsystematic risk consist of business and financial risk. The systematic risk is therefore, effecting the total environment and is outside the control of one firm on individual. Unsystematic risk is inherent to the system. It may be due to bad financial planning or wrong management decisions. These risks are internal and can be avoided or controlled. Risk is fundamental to the process of investment. Every investor should have an understanding of the various pitfalls of investment. For the convenience of the investors, analysts measure risks to able to combine securities and to reach that portfolio which suit’s the individual needs of an investor risk is measured through beta test. 1.2 PROBLEM STATEMENT: Earning maximum returns on investments is definitely the motto for any investor. Selecting stocks however, exclusively on the basis of maximization of return is not enough. The fact that most investors do not place their available funds in few stocks promising higher returns suggest that other factors must be considered besides returns in HRIHE, HASSAN Page 8
  9. 9. “EMPHERICAL TESTING OF CAPM” selection process. Investor wants to maximize expected return subject to their assessment and capacity to take risk. The risk associated with the holdings is that the return the study of risk vis-à-vis reruns always holds a great significance, which immensely helps in key decision-making process than the return that was expected. Hence, the study of risk vis-à- vis reruns 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 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 arid their measurement using Capital Asset Pricing Model (CAPM) will be the core of to study undertaken. The attachment of the paramount importance these two principal properties; return and risk, Inherent in securities with the analysis of any investment decision makes the study significant. 1.2 OBJECTIVE OF STUDY: • To measure the return on securities selected HCL Technologies, Wipro, Infosys, and Tata consultancy Services Limited • To measure the systematic risk of the security by using beta as a measure of risk. • To calculate expected rate of expected by investors on security for any level of risk. • To evaluate with performance of stock using CAPM model. HRIHE, HASSAN Page 9
  10. 10. “EMPHERICAL TESTING OF CAPM” 1.03 SCOPE OF THE STUDY: • The study is confined to the statistics of the four leading companies in IT industries. • The BETA is calculated based on the returns for limited period as share prices for the period of 60 months. • Only secondary sources data is used for 'the study, which limits with scope, of the research work. • The index selected is Standard & Poor CNX NIFTY changes the index could resu1t in discrepancies in the result obtained. • The firms selected for analysis have to be listed on NIFTY (since NIFTY is considered as the index). HRIHE, HASSAN Page 10
  11. 11. “EMPHERICAL TESTING OF CAPM” 1.04 METHODOLOGY: RESEARCH DESIGN: This study is an empirical one. Empirical research methods are a class of research methods in which data are collected in order to answer research question. STUDY DESIGN: In this study an attempt has been made to experiment the “Seasonality in Indian Stock Market” closing value of S&P Nifty Index as the sample. TYPES OF DATA: Secondary data has been used for the analysis purpose. HRIHE, HASSAN Page 11
  12. 12. “EMPHERICAL TESTING OF CAPM” STUDY TYPE: The study type is analytical, quantitative and historical. Analytical because facts and existing information is used for the analysis, Quantitative as relationship is examined by expressing variables in measurable terms and also Historical as the historical information is used for analysis and interpretation. SAMPLING FRAME: Sampling frame includes the closing value of S&P Nifty Index. Sample includes historical closing values of S&P Nifty index value for the period of five years from 3rd March 2005 to 3rd March 2010 Sample Technique. SAMPLE TECHNIQUE: The sampling technique used is the convenient sampling. As the name implies, the sample is selected because they are convenient. S&P CNX Nifty is a benchmark stock index based on the selected stocks traded at National Stock Exchange (NSE). DATA GATHERING PROCEDURE: The major data relevant for this research is secondary data which has been collected from Bangalore Stock Exchange ( BGSE ). DATA AND SAMPLE :  The study is based on BSE Sensex companies that were part of the index from the beginning up to 30th June 2005.  The list of 66 companies is drawn based on two criteria:-  The companies selected should have been constituents of BSE Sensex  Traded for a minimum time of six months in a year during the study period  The data was collected from the CMIE (Prowess package), BSE, NSE, RBI, DCA, SEBI websites, etc. HRIHE, HASSAN Page 12
  13. 13. “EMPHERICAL TESTING OF CAPM” CONVENIENT SAMPLING Selection of Companies: The economy was classified into segments as shown. In each, of these segments a leading firm as selected. This firm is considered as a representative of the top performing firms in the segments. SEGMENT FIRMS Wipro Technologies ltd Infosys technologies ltd Information Technologies HCL Technologies ltd TCS METHOD OF CALCULATION OF RETURNS- STEP: 1 Daily share price of the stock is collected from the website of National stock exchange. STEP: 2 The Daily index Value (NIIFTY) is downloaded from the National Stock Exchange Website (www.nseindia.com) the composition of NIFTY is subjected to scrutiny on a periodic basis. Any change in the composition of the NIFTY could impact all the index value. STEP: .3 The Daily return (in percentage terms) of the stock and the index is calculated. STEP: 4 These daily returns can be annualized in two ways: (a) Arithmetic mean (b) Geometric mean Geometric method is always a better option since compounding is taken into account thought returns could be annualized using natural logarithm. The geometric method of annualizing the return (by compounding) was preferred for its simplicity. HRIHE, HASSAN Page 13
  14. 14. “EMPHERICAL TESTING OF CAPM” NOTE: The data has been analyzed from 1st January 2005 to 31st December 2010(i.e., for a period of 5 years). Even stock splits are considered over a period of time. STEP: 5 To find Beta Value of the stock is calculated using SPSS software. Beta is the only measure in the CAPM concept. STEP: 6 Expected return calculation needs the risk free rate Rf is treasury bill. So, we have assumed it as 6%. STEP: 7 Expected Return by CAP M E(R) =Rf+ β(Rm- Rf) Where, Rm = Market Return of NIFTY β= Beta Value (Return of Scripts and return of index) , STEP: 8 Construction of “security market line” keeping Beta is the only measure scrutiny market line was constructed for each firm's in order to identify the undervaluation and over valuation of stock. STEP: 9 An detail analysis has been made with various sector stocks that the performance of the stock could indicate that the expected return forecasted for a stock is more or less than its "fair" return given its risk and it is also analyzed that this model helps us to make an educated guess as the expected return on asset that have not yet been traded in the market place. Although the CAPM does no fully with stand empirical tests. It is widely used because the insight it offers and because its accuracy suffices for important application. HRIHE, HASSAN Page 14
  15. 15. “EMPHERICAL TESTING OF CAPM” 1.05 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 January 2001 the effect if the change in NIFTY values would not have an impact on the study. HRIHE, HASSAN Page 15
  16. 16. “EMPHERICAL TESTING OF CAPM” • Since the returns the calculated on yearly vise the Risk free Rate (Rf) was assumed as 6%, which would not give us a realistic picture of; 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 • There may be a variation in calculation because we have tested the CAPM using ex post data, than ex ante data. HRIHE, HASSAN Page 16
  17. 17. “EMPHERICAL TESTING OF CAPM” CHAPTER- 2 REVIEW OF LITERATURE 2.01 AN OVERVIEW OF CAPITAL ASSET PRICING MODEL CONCEPT The capital Asset pricing model is based on two, Parameter portfolio analysis model developed by Markowitz (1952). This model was simultaneously independently developed by John Linter (1965), Jan Mossion (1966) and William Sharpe (1964). In HRIHE, HASSAN Page 17
  18. 18. “EMPHERICAL TESTING OF CAPM” equation form the mode can be expressed as follows: E(R)=Rf+ β(Rm- Rf) Where: E (Rj) is expected return on asset)) Rm- Rf) Rf is Risk free rate of return E (Rm) is expected return on market, B is a measure of risk specific to asset. This relationship between expected return on asset and expected return on market portfolio is called as security market line. If Capital Asset Pricing Model (CAPM) is valid all securities will lie on the straight line called the security market line in the E (Rj) P frontiers. The security market line implies that return is a linearly increasing function of risk. Moreover only the market risk affects the return and the investors receive no extra return for diversifiable (residual risk). The market reward-to-risk ratio is effectively the market risk premium and by rearranging the above equation and solving for E(Ri), we obtain the Capital Asset Pricing Model (CAPM). The capital asset pricing model which is referred as CAPM is a centerpiece of modem 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 vita functions. It provides benchmark rate of return for evaluating possible investments. it helps us to make, education guess as to the expected return on asset that has not been traded in the market place. For eg: how do we price initial public offering of stock? How will a major new investment project affect the return investors require on a company stock? Although the CAPM does not fully withstand empirical test, it is widely used because of the insight it offers and because its accuracy suffices for important application. The CAPM Model uses topic concept of Beta to risk for the study, firm were short listed in each category of the industry such as IT, & Antitragi's FMCG, Pharmaceuticals. The performance of stock is analyzed ones a time period of 5 years l st January 2004 to31st December 2008. HRIHE, HASSAN Page 18
  19. 19. “EMPHERICAL TESTING OF CAPM” 2.02 WHAT IS RISK? Risk and uncertainty are in integral part of an investment decision. Technically 'risk' can be defined as a situation where the possible consequences of the decision that is to be taken are known. Uncertainty is generally defined to apply to situations where the probabilities cannot be estimated. However, risk and uncertainty are used inter changeably. Risk is composed of the demands that bring in variations in return of income. The main Forces contributing to risk are Price and interest. Risk is also influenced by external and internal. External risks are uncontrollable and broadly affect investments. These external risks are called systematic risk. Risk due to internal environment of a firm or that affecting a particular industry is referred to as unsystematic risk. 2.03 DEFINING RISK: Risk in holding securities is generally associated with the possibility that realized returns will be less that the returns that were expected in the most basic sense risk is the' chance and financial loss. Forces that contribute to variation is return, in return - price or in dividend contribute demeans of risks, some influences are external to the firm that cannot be controlled and affect coverage number of securities and other influences are internal to time firm and are controlled to a large degree. 2.04 TYPES OF RISK: 1) SYSTEMATIC RISK: Systematic risk is non-diversifiable and is associated with the securities market as well as the economic, sociological, political and legal considerations of the prices of all securities in the economy. The affect of all stocks will move in the same direction. For example, during a boom period prices of all securities will rise and indicate that the economy is moving towards prosperity. 2) UNSYSTEMATIC RISK: Unsystematic risk is unique to a firm or industry. It does not affect an average investor. Unsystematic risk is caused by factors like labor strike, irregular disorganized management policies and, consumer preferences. These factors are independent of the price mechanism operating in the securities market. The HRIHE, HASSAN Page 19
  20. 20. “EMPHERICAL TESTING OF CAPM” problems of both systematic and unsystematic risk are inherent in industries dealing with basic raw-materials as well as in consumer goods industries. TYPES OF RISK Systematic and Unsystematic risks can be further classified. Systematic risk covers market risk, interest rate and unsystematic risk contains business and financial risk. Every industry and its shareholders face both systematic and unsystematic risk. The systematic portion results from overall market influences and the unsystematic portion results from company and industry influences Systematic and unsystematic risk can be sub-divided and analyzed separately. SYSTAMATIC RISK Market risk, interest rate risk and purchasing power risk are grouped under systematic risk. a) MARKET RISK: Market risk triggers off through real events comprising political, social and economical reasons. The initial decline of 'rise' in market price will create an emotional instability of investors and cause a fear of loss or create an under confidence, relating to the possibility of profit. The gain will bring in the activity of active buying of securities. However, investors are more receive towards decline in prices rather than increase in prices. Investors can try and eliminate market risk by being conservative in farming their portfolios. They any time their stock purchases and also choose growth stocks only. These methods will reduce their risk to some degree but as explained earlier, market risk will not be completely eliminated because falling markets would bring down the prices of all stocks. b) INTEREST RATE RISK: Interest rate risk can also be reduced by analyzing the different kind’s securities available for investment. A government bond or a bond issued by the financial institution like IDBI is a risk less bond. Even if government bonds give a slightly lower rate of interest in the long run are better for a conservative investor because he/she is assured of return. Moreover, government bonds are made more attractive by additional advantages of tax benefits. Therefore, one way to avert interest rate risk would be to purchase government securities. HRIHE, HASSAN Page 20
  21. 21. “EMPHERICAL TESTING OF CAPM” c) PURCHASING POWER RISK: Purchasing power risk is also known as inflation risk. This risk arises out of change in the prices of goods and services and technically it cover both inflation and deflation periods. During the last two decades, it has been seen that inflationary pressures have been continuously affecting the Indian economy. Therefore, in India, purchasing power risk is associated with inflation and rising prices in the economy. Inflation in India has been either 'cost push' or 'demand pull'. This type of inflation has been seen when cost pf production rise or when there is a demand for product but there is no smooth supply' and consequently prices rise. In India, the cost- push inflation has led to enormous problems as the rise in prices of raw materials has greatly' increased cost of production. The increases in costs of production have shown a rising trend in 'wholesale price index and consumer price index'. A rising trend is price index reflects a price, spiral in the economy. UNSYSTEMATIC RISK Unsystematic Risk is specific to a particular company or an industry. Unsystematic risk is that portion of total, risk that arises due to the factors which affects the internal working of the firm. Factors like, management capability, consumer preferences, labor strikes and stages in product life cycle can affect the firm's variability in return. Two main sources of systematic risks are" Business Risk and Financial Risk. Unsystematic risk be eliminated through diversification and proper asset allocation. An investor gets no reward for taking unneeded unsystematic risk as this risk can be easily eliminated by diversification. a) BUSINESS RISK: Business risk is faced by the, firm due to the operating conditions prevailing within a firm and also the extent to which these conditions affects the operating income and expected dividend variability of the firm. Business risk can be divided into two categories Internal and External. Internal Business Risk signifies the internal competency or efficiency of the firm to effectively operate in the environment imposed on it. Every business firm is faced with internal risks and the degree to which these risk are minimized are reduced depends on the efficiency of the firm. For example, the firm can minimize the chances of labor strikes by efficiently managing the management -labor relationship. External Business Risk arises from the circumstances imposed by the operating HRIHE, HASSAN Page 21
  22. 22. “EMPHERICAL TESTING OF CAPM” environment, which are beyond the control of the firm. Every firm faced certain external risk, which arises as the result of operating in the specific industry. For example sales in steel and auto industries move in accordance to the businesscyc1e. 'Demographic considerations also affect the, revenue of a firm also the political policies, which include monetary and fiscal policies effect are an important part of external business risk. b) FINANCIAL RISK: The ways and means by which company finances their activity constitutes Financial Risk. The degree of financial risk can be interred from the capital structure of a firm. The amount of debt or borrowed capital in the financial structure signifies interest payment by the firm to the debt holders or preference shareholders. As a result of which the, earning left for equity shareholders keep varying depending on the interest and principal, payment Financial, risk can be avoidable to the extent to which the management has the freedom to decide whether to borrow money or not. A debt free firm has no financial risk. c) DIVERSIFICATION OF PORTFOLIO: Unsystematic risk diversifiable risk can be eliminated though diversification in portfolio. Diversification means dividing the portfolio into different stocks and not investing the money in one particular stock. This will provide the investor with better return and better risk management, as this will distribute the risks. This is due to the fact that the returns on money invested in different securities indifferent industries are negatively co-related so their risk will rise and fall without any relation to each other. For example, as investor has bought the stocks of an umbrella company and company manufacturing sunglasses which are negatively correlated. So, the fall in return on umbrella, stocks will be offset with the increase of return in sunglasses stocks during summer. The explanation of the ingredients of systematic risks show that market interest rate risk and purchasing power risk are the principal sources of systematic risk in securities the unsystematic rise which affects the internal environment of a firm or industry although peculiar to a particular industry also causes variability of returns for a company's stock. The two kinds of unsystematic risks in a business organization are 'Business Risk and Financial Risk'. The characteristics of these firms of risks are broadly described. 2.05 RISK MEASUREMENTS: Risk of an asset can be measured using statistics, the two statistics being the HRIHE, HASSAN Page 22
  23. 23. “EMPHERICAL TESTING OF CAPM” standard deviation and the co-efficient of variation that can be used to measure the variability of asset returns. 2.06 STANDARD DEVIATION The most common statistical indicator of an asset risk is the standard deviation, which measures the dispersion around the expected value. The greater the magnitude of deviation and the greater the probability of its occurrence, the greater is said to be risk of the security. Although, many people concerned only with downside risk, or the possibility of a negative return as these consider only returns below the expected value are nevertheless the common approach is to view risk as determined by the variability on either side of the expected value because the greater variability, the less confident one can be of the outcomes associated with an investment. The expected value of a return R is the most likely return on 'an asset that is, calc u1ate d as Expected Return = ∑ Rj Pri Where, Rj = return for the outcome Pri = Probability of occurrence of the I the outcome N = No. of outcomes considered. The expression for the standard deviation of returns In general, higher the standard deviation, the greater the risk. 2.07 CO-EFFICIENT OF VARIATION The co-efficient of variation, is a measure of relative dispersion that is useful in comparing the risk of assets with differing returns. The following equation gives the expression for the co-efficient of variation. ∑j CV = __________ ji HRIHE, HASSAN Page 23
  24. 24. “EMPHERICAL TESTING OF CAPM” The higher the co-efficient of variation, the greater. The real utility of the coefficient of variation come in comparing the risk of assets that have different expected returns. 2.08 CO-VARIANCE While standard deviation is an excellent measure for calculation of risk of individual stocks, it has its limitations as a measure of a total portfolio. With the correlation, the covariance approach should also be considered while there ate two or three stocks on the portfolio. Co-variance can be used to achieve the highest portfolio expected return for a pre-determined portfolio variance level or the lowest portfolio return. An individual security' expected return and variance express return and risk for portfolios of stocks; the expected return is the weighted according to each securities rupee proportion in the portfolio. Since stocks tend to cover or move together, portfolio risk cannot expressed for an individual stock. The formula for calculation of co-variance I and J and the covariance of stocks with beta co-efficient is shown. 2.09 RETURN MEASUREMENT The returns incorporate both income and price, change into a total return. Return across the time or from different securities can be measured and compared using the total return concept. The total return for a given ,holding period relates all the cash flows received by an investor during any designated time period to the amount it of money Inverted in asset. It is defined as TOTALRETURN=Cash Payment Received + Price Change Over the Period. Purchase Price of the Asset The price change ones the period' is the difference between the beginning (or purchase) price and the ending price (or sales) price. Symbolically it can be define as HRIHE, HASSAN Page 24
  25. 25. “EMPHERICAL TESTING OF CAPM” Pt- Pt-l + Ct Rt = Pt-l Where, Rt = Actual return during period '1' Pt = Price of asset at time '1' Pt-l = Price of asset at time '1' Ct = Cash flow received from the asset in the time period (t-l) to l GEOMETRIC MEAN = n√(1+Rt) (1+R2)………..(1+Rn) -1 2.10 CAPITAL ASSET PRICING MODEL (CAPM) The capital asset pricing model is a set or predictions concerning equilibrium expected returns on risky assets. Harry Markowitz laid down, the foundation of modem portfolio management in 1952. The CAPM was developed 12 years later in articles by William Sharpe, John Linter, and Jan Mission. The time for this generation indicates that the leap from Markowitz’s portfolio selection model to the CAPM is not trivial. We will approach the CAPM by' posing the, question "what if', where the "if' part refers to a simplified world. Positing' an, admittedly unrealistic world allows a relatively easy leap to the "then" part. Once was accomplish this, we can add complexity to the hypothesized environment one step at, a time and, see how the conclusions must be amended. This process allows us to derive a reasonably-realistic and comprehensible model. We summarize 'the simplifying assumptions that lead to the basic version of the CAPM in the following list. The thrust of these assumptions is that we try to ensure those individuals are as alike as possible, with the notable exceptions of initial wealth and risk aversion. We will see that conformity of investor behavior vastly our analysis. 1. There are many investors, each with an endowment (wealth) that is small compared to the total endowment of all investors. Investors ate price-takers, in that they act as though security prices are unaffected by their own trades this is the usual perfect competition assumption of microeconomics. 2. All investors plan' for one identical holding period. This behavior is myopic (short sighted) in that it ignores everything that might happen after the end of the single period HRIHE, HASSAN Page 25
  26. 26. “EMPHERICAL TESTING OF CAPM” horizon myopic behavior is in genera, suboptimal. 3. Investments are limited to a universe of publicly traded financial assets, such as stocks and bonds, and too risk-free borrowing by lending arrangements. This assumption rules out investment in non-traded assets such as education (human capital), private enterprises and governmentally funded assets such as town halls and internationally airports. It is assume also that investor's may borrow or lend any amount at a fixed, risk-free rate. 4. Investors pay no taxes on returns and no transaction costs (commissions and service charges) on trades in securities. In reality of course, we know that, investors are in different, tax brackets and that this may govern the type of assets in which they invest for example, fax implications may differ depending on whether the income is from interest, dividends, and capital gains. Furthermore, actual trading is costly, and commissions and fees depend on the size of the trade and the good standing of the individual investor. 5. All investors are rational mean-variance optimizers, meaning that they all use the Markowitz portfolio selection model. 6. All investors analyze securities in the same way and share the same economic view of the world. The result is identical estimates of the probability distribution of future cash flows from investing in the available securities that is for any stock of security prices, they all derive the same input list to feed into the Markowitz model. Given a set of security prices and the risk-free interest rate, all investors’ use the same expected returns d covariance matrix of security returns to generate the, unique optimal risky portfolio. This assumption is, often referred to as homogeneous expectations or beliefs. CAPITAL ASSET PRICING MODEL Formula HRIHE, HASSAN Page 26
  27. 27. “EMPHERICAL TESTING OF CAPM” E (Ri) =Rf+ β (E (Rm) - Rf) , Where,E (Ri) is expected return on Asset, Rf is Risk free rate of return E (Rm) is expected Return on Market β is a measure of risk specific to asset. The performance of stock is evaluated by the Actual Returns experienced versus the Expected Returns. The capital Asset pricing model issued to identify the expected return. The CAP - Model uses the concept of, Beta to Risk adjust the performance of the market ones and above the risk free rate of return. 2.11 BETA ESTIMATION: The, most important part of the equation is B or Beta. It is used to describe the relationship between the stock return and, market index's returns. If the regression line is at an exact 45 degree angle beta will be equal to 1.0. A 1% change in market index shows it is on the average accompanied by a 1%, change in the stock of the vertical axis. The percentage changes in the prices of the stock are regressed against the percentage changes in the price of a market index. Usually in the S & P CNX NIFTY price index, ** Beta may be positive or negative. Usually betas are found to be positive. We rarely find a' negative beta, which reflects a movement, contrary to the market. 4:5 beta, indicates that the market index change of 1 % was whatever the market index rose or fell by 1 %, the stock could rise and fall by 1.5%. Beta is referred to a systematic risk to the market, and a + E is the unsystematic risk. Beta is a useful price of information both for individual stock as well as portfolios but as a measure of risk, it is better used in the analysis of portfolios. Also beta measures satisfactorily for diversified efficient portfolios but inefficient portfolios. For the presence it may be said that beta is a satisfactory measure for portfolios, because risk other than that reflected by beta is diversified. Beta has certain limitation within which it must be considered. While calculating past betas, the length of time will affect beta size. When estimating future betas, the market expected return should also be estimated. If high beta is accurately predicted and the market also goes up predicted the relationship will work. On the contrary, high beta estimation and low market or downward market will show that beta will drop much faster than the market. Finally its shortcoming as a measure for individual stock as already explained should be realized while' calculating stock. HRIHE, HASSAN Page 27
  28. 28. “EMPHERICAL TESTING OF CAPM” ADVANTAGES OF BETA To followers of CAPM, beta is a useful measure. A stock's price variability is important to consider when assessing risk. Indeed, if you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say a safe-haven utility industry stock with a low beta. Besides, beta offers a clear, quantifiable measure, which makes it easy to work with Sure, there are variations on beta depending on things such as the market index used and the time period measured, but broadly speaking, the notion of beta is fairly straight forward to understand. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method that discounts cash flows. DISADVANTAGES OF BETA However, if you are investing in a stock's fundamentals. Beta has plenty of shortcomings. For starters beta doesn't incorporate new information. Consider the electrical utility company American Electric Power (AEP). Historically, AEP has been considered a defensive stock with a low beta. But when it entered the merchant energy business and assumed high debt levels, AEP's historic beta no longer captured the substantial risks the company took on. At the same time many technology stocks such as, Google, are so new to the market they have insufficient price history to establish a reliable beta. Another troubling factor is that past price movements are very poor predictors of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short periods, beta is a fairly good risk metric. But for investors with long-term horizons, it's less useful. HRIHE, HASSAN Page 28
  30. 30. “EMPHERICAL TESTING OF CAPM” 3.01 INDUSTRY SCENARIO: A. INTRODUCTION: Basically, Securities markets provide a channel for allocation of savings by an individual or an organization to those who have a productive need for them. So, a security market can be said a location where the savers meet the real investors who need the fund. The savers and investors are constrained by the economy’s abilities to invest and save respectively which thus helps market in enhancing savings and investment in the economy. Stock Market is therefore affected by the dynamics of the economic, political, cultural and environmental activities within the country and rest of the world. A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion [1] US at the beginning of October 2008. The total world derivatives market has been [2] estimated at about $791 trillion face or nominal value, 11 times the size of the entire [3] world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. B. BRIEF HISTORY: HRIHE, HASSAN Page 30
  31. 31. “EMPHERICAL TESTING OF CAPM” Indian Share Market is the oldest Asian stock market incorporated in 1875. The name of the first share trading association in India was Native Share and Stock Broker'Association which later came to be known as Bombay Stock Exchange. This association started with 318 members. The Bombay Stock Exchange is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai's Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dallas Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sect oral indices. Three segments of the NSE trading platform were established one after another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world. In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of HRIHE, HASSAN Page 31
  32. 32. “EMPHERICAL TESTING OF CAPM” 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poor's. In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as 'Best IT Usage Award' by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999). The past decade has been quite remarkable for the Securities market in India with the boom in the economy fuelled by better banking system. It has grown exponentially and the market has also witnessed fundamental institutional changes. There have also been significant improvements in efficiency, transparency and safety. However global economic activity decelerated towards the end of the calendar year resulting in investment concerns on account of the sub-prime crisis in the US and other developed nations. Naturally the effects of this slowdown spilled over into developing economies also and we are looking ahead with some degree of concern over the prospects in the near future. In recent days economic collapsed in variation of the foreign investors fund main effect of the Indian economy in 2008-2009 the Bombay Stock Exchange (BSE) the sensex was 13,400 in the month of 8th July 2009. In other side National Stock Exchange (NSE) 3,974 is in the same month of 2009. Since the markets has taken up word moment from 9th July 2009 from the low of 3,974 to 4,578 on 24th July 2009 due to the Sharpe recovery in global economy as well as the 1 st quarter Results of all major company which has been announced better than expectations, Hence Indian markets are one of the fastest emerging markets in world and attracted by many Foreign intuitional investors. C. THE REGULATORY AUTHORITY: SEBI The rise in number of investors was also leading to an increase in malpractices on part of the companies, brokers, merchant bankers, investment consultants and various other agencies involved in new issues. This led to erosion of investor confidence. The Government and the stock exchanges Realizing this, Securities Exchange Board of India (SEBI) was constituted HRIHE, HASSAN Page 32
  33. 33. “EMPHERICAL TESTING OF CAPM” were helpless as the existing legal framework was just not enough. by the Government of India in 1992 THE MAJOR FUNCTIONS OF SEBI:  To promote fair dealings by the issuers of securities and ensure a market place where funds can be raised at relatively low costs.  To provide protection to the investors and safeguard their rights and interests such that there is steady flow of savings into the market.  Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market  Prohibit insider trading in securities.  To regulate and develop a code of conduct and fair practices by the intermediaries involved in the stock market etc. Outlook 2009-10 The Indian markets traded in a very narrow range during April amidst mixed cues coming from global and domestic markets. While the markets were hurt by the sovereign debt default concerns of Greece and SECs allegations against Goldman Sachs, it found some comfort from good set of FY 2009-2010earnings numbers declared by India Inc... India’s industrial output, as measured by the Index of Industrial Production (IIP), grew by 15.1% as against an annual gain of 16.7% in January 2010, and17.6% in December 2009. Industrial production grew by a mere 0.2% in the same month last year. Manufacturing output rose by 16% as against a mere 0.2% in February 2009, while Mining production was at 12.2% versus (-) 0.2% in the year-ago period. Electricity sector output expanded by 6.7%compared to just 0.7% in the same month a year Consumer Durables production expanded by 29.9%in February 2010 as against 6% in the same period in 2009. Output in Capital Goods grew by 44.4% in February 2010 as against 11.8% for the same month of 2009. The growth rate in Basic Goods category stood at 8.4% versus a contraction of 0.1% in the year-ago period. Intermediate Goods' output rose by15.6% in the month under review versus (-) 3% in the year-ago period. As many as 14 HRIHE, HASSAN Page 33
  34. 34. “EMPHERICAL TESTING OF CAPM” out of the 17 industry groups showed a positive growth during February 2010 compared to the corresponding month of the previous year. 3.02 COMPANY PROFILE: Company History & Background Asit C. Mehta Investment Intermediates Ltd. (ACMIIL) was established in the year 1986 with a view to offer a one-stop solution to Indian entities for their needs in financial services. Over the last two decades it has achieved the distinction of being amongst the most trusted and reputed brokerage houses in India. It provides a complete bouquet of products in equity, debt, commodities, forex, depository, derivatives and allied services in HRIHE, HASSAN Page 34
  35. 35. “EMPHERICAL TESTING OF CAPM” India. Asit C. Mehta Investment Intermediates Ltd. (ACMIIL) is the most trusted and reputed brokerage house for providing investment-related services in the capital market and money market and depository services in India. The company is jointly promoted by noted stock market professionals, Mr. Asit C. Mehta and Mrs. Deena A. Mehta, and is a part of the Mumbai-based Nucleus Group of Companies. The other group companies are engaged in IT and IT related services such as development of databases, back-office applications for banks, corporate document management solutions and geographical information systems (GIS). ACMIIL has pan-India presence through its branches, business associates, and marketing agents. You can also become a part of this growing business and assist us in increasing investor base, spreading investor education, and providing capital market services to clients. VISION, MISSION & QUALITY: Envisioned to be the “Trusted Financial Intermediary”, the group has etched out a very specific corporate purpose – “To reach appropriate financial products, services and solutions to every Indian entity.” PURPOSE To reach appropriate financial products, services and solutions to every Indian entity. Our Belief  That every household can, should, and will need to participate in the financial markets directly or indirectly to protect their financial interests  That regulatory/legal compliance ensures economic sustainability.  That transparency and fairness are the cornerstones of all dealings.  That knowledge rather than capital is the key driver of this business.  That product, process, and technology led innovations are necessary preconditions for continuously adding value for all our constituents. THE FIRSTS TO OUR CREDIT: HRIHE, HASSAN Page 35
  36. 36. “EMPHERICAL TESTING OF CAPM”  First limited liability Company to acquire membership on Bombay Stock Exchange.  First multiple seat holder and multiple exchange members.  First to achieve the ISO quality certification for business processes.  First to receive a CRISIL grading for quality of operations and services.  Company Managing Director Mrs. Deena Mehta was the first lady to be elected to the governing board of the Stock Exchange Mumbai and first and only lady to be the President of Stock Exchange, Mumbai. Values, Relationship…core to our business We are currently expanding our business in the retail and institutional segments on the domestic and overseas (NRI/FII) fronts. We have select positions open for marketing, sales, research, back office operations, and business development activities. At Asit C. Mehta, we aim to select a candidate whose goals are aligned with ours. Knowledge about the product, a conceptual understanding of the financial markets, a thirst to innovate, desire to grow within the company, meticulousness towards the task on hand, an ability to design and follow process are all qualities valued in the company. We foster a culture that rewards talent, initiative, hard work, and accountability and nurtures teamwork. Shareholders Asit C Mehta Investment Intermediates Ltd. (ACMIIL) is incorporated as a publicly held limited liability company in India under the Indian Companies Act, 1956. The company was incorporated in the year 1993 under the new enabling provisions for limited liability stock broking companies framed by the Government to encourage limited liability company in this area. ACMIIL was first such company on the Bombay Stock Exchange. Currently, the company is mostly held by its founder shareholders as follows:  Mr.Asit C Mehta  Mrs.Deena Asit Mehta  Mr.Kirit H Vora HRIHE, HASSAN Page 36
  37. 37. “EMPHERICAL TESTING OF CAPM”  Nucleus Net soft & GIS (India) Ltd. COMPANY BACKGROUND Asit C Mehta Financial Services ltd Computers Software - Medium / Small ISIN Demat INE041B01014 Book Value 22.75 NSE Symbol NA Div & Yield % 1.487 Market Cap (Rs. Cr) 23.53725 P/E 108.06818 EPS 0.44 Face Value 10 Incorporation Year 1984 Registered Office Nucleus House Saki Vihar Road, Opp L&T Gate No 7,Andheri (E), Mumbai, Maharashtra-40007 Telephone 91-22-28570781 Fax 91-22-28578352 Chairman and Managing Director Asit C Mehta Company Secretary Tushar Kapadia Auditor Manek & Associates Face Value 10 Market Lot Listing Mumbai 1 Registrar Link Intime India Pvt Ltd, C-13 Pannalal Silk, Mills Cmpd LBS Road, Bhandup West, Mumbai – 400 078 SERVICE STANDARDS & COMPLIANCE: In order to institutionalize business processes, our company has moved to a documented customer-centric quality management system. This has ensured that the entire organization is driven by the common objective of delivering quality brokerage services that would create a unique brand and top-of-the-mind recall. We are the first brokerage house to be certified under ISO 9001:2000 for the Equity and Debt segments. We are also first stock brokerage house to be graded under the Broker Grading service by Credit Rating & Information Services of India Ltd. (CRISIL) for our quality of operations and services provided to clients. HRIHE, HASSAN Page 37
  38. 38. “EMPHERICAL TESTING OF CAPM” MEMBERSHIP: • Cash Market: BSE, NSE • Derivatives: BSE, NSE • Debt: NSE • Foreign Exchange: Accredited by FEDAI • PMS under SEBI License • Merchant Banking: Approved by SEBI under Category I • Commodities: NCDEX MCX, DGCX, EAST INDIA Clearing Bank: State Bank of India Reach and Access (as on July 01, 2009) Investment Centre’s: 665 (branches, franchisee, etc.) States & UT covered: 26 Employees: 1002 PRODUCTS AND SERVICES: • Equity – Initial Public Offering (IPO) • Equity – Secondary trading (cash and derivative) • Equity – PMS • Equity – Online Trading • Equity – Depository Services • Equity – Investment Advisory (fundamental and technical) • Equity – Mutual Fund • Equity - Arbitrage • Commodity - Derivatives • Debt – Government Securities • Debt – Primary Placements HRIHE, HASSAN Page 38
  39. 39. “EMPHERICAL TESTING OF CAPM” • Debt – Advisory • Debt – Mutual Funds • Debt – Relief bonds, etc. • Forex – Interbank broking • Merchant Banking – Amalgamation & Mergers • Merchant Banking – Private Equity Merchant Banking – Public Offering. OUR SERVICES:  Equity and Derivatives Trading: Equity trading is offered to retail clients through different channels in the Bombay Stock Exchange (BSE) & the National Stock Exchange of India (NSE), for the cash and the derivatives segments. Investors are serviced through a PAN India network of over 650 associates / locations comprising of 585 franchisee and 65 company branches. (as on July 2009)  Online Trading: Investmentz.com is our trading portal that offers online trading to retail investors in the BSE and NSE cash and derivatives segments. The investors can do their own trading through a browser-based interface as well as a streamer-based solution called Live exchange. This service is also available through an Interactive Voice Response (IVR) facility for those clients who are unable to access the Internet service at any time. The company has tied up with leading nationalized, private and co-operative banks to offer share-trading services to the banks' customers. A seamless gateway has been established between the banking and depository software of the bank. Institutional Desk: Equity trade execution services are provided to institutional investors both domestic and FII by our institutional desk. Research and market. HRIHE, HASSAN Page 39
  40. 40. “EMPHERICAL TESTING OF CAPM”  Investment Banking: ACMIIL has been granted a Category I Merchant Banking license by SEBI. It offers services in mergers, amalgamations, private equity, public offerings and a full gamut of investment banking services.  Commodity Trading Service are Provided Through Our Associate: Asit C. Mehta Commodity Services Pvt. Ltd. The company is member of India’s premier commodity exchanges, namely, the Multi Commodity Exchange of India Ltd. (MCX), the National Commodity & Derivatives Exchange, India (NCDEX) and the East India Cotton Exchange Association (EICA). The online trading portal also provides facility to trade on NCDEX. One of the group company is a member of Dubai Gold & Commodity Exchange (DGCX).  Inter-Bank Forex Desk: Our associate company, Asit C Mehta Forex Pvt. Ltd., undertakes inter-bank forex order execution. Accredited by the Foreign Exchange Dealers’ Association of India (FEDAI), the company is empanelled with approximately 60 banks and has a reasonable presence in the market. SUPPORT SERVICES  Research: Investors are provided with extensive information on markets and companies through hourly market reviews, periodic market commentary and recommendations, which enable them to make informed decisions. The company firmly believes that providing continuous and accurate decision making tools can add substantial value to its investors.  Advisory Services: Advisory services are provided as a value-added service to all retail and institutional clients. This service is delivered through the hourly, daily, weekly, fortnightly and monthly publication of fundamental and technical research. Calls are made through HRIHE, HASSAN Page 40
  41. 41. “EMPHERICAL TESTING OF CAPM” broadcast services on our private VSAT network, SMS and e-mail.  Accounts Information: Accounts information to the retail clients is provided through access on our website. This assists clients in knowing details about their trading accounts and their resultant obligations through various reports like Bill, Contract, Financial Ledger, Transaction Register, Stock Register, Portfolio Tracker, Stock holding position, etc. E-contracts are generated for investors giving trade details. OTHER SERVICES:  Price Ticker ACMIIL, in association with Capital Market Publications, presents the equity/derivative/commodity price ticker for easy desktop access to capital market information. The prices reflected are generally delayed by five minutes, and any additional delay (if any) depends on the user’s connectivity and computer system configuration. You can customize the ticker as per your individual needs.  Alertz As our registered client, Investmentz.com provides you with ‘Alertz’ facility on your email SMS and assists you in your investment decision, thus enriching your capital market investment experience through us. Investmentz.com’s Alertz service keeps you informed about stock prices through email and SMS. You may activate the Email Alertz service and track your selected stocks/indices without monitoring the trading terminal during market hours. It is now very easy to track the prices of your selected stocks without deviating from normal activities .The SMS Alertz service is available for trade confirmation, fund pay-in and pay-out, market views/calls, etc, to clients who actively use our trade execution services. As general information, Investmentz.com does not guarantee any accuracy of generation, databases, and delivery timings, and does not make any claims of any nature in this matter The critical components to avail the Alertz service are: HRIHE, HASSAN Page 41
  42. 42. “EMPHERICAL TESTING OF CAPM” a) Internet connectivity / bandwidth speed at your end, b) Information feed available from the exchange, c) Computing speed of the Alertz, and d) Speed of your Internet Service provider (ISP) and/or domain provider and/or Telecom service provider (TSP).  Advice Me To service general retail investor and assistance them in systematic creation of wealth, we could try to provide you with some basic / brief investment idea on stock of your interest. You could ask us an investment question related to a particular stock or sector and we would see that brief research (fundamental / technical) input could be provided on that stock or sector. Whatever may be our research input on your inquiry, still the final investment decision would need to be taken by you as you know your investment profile & habits, risk appetite, income – cash flow, person / family / social obligation, etc. Potential Growth Areas: India is amongst the least affected countries in the 2008 global meltdown. May 2009 general election in the country provided a fairly stable government. We see great potential for the country in general and financial market in particular in the years to come. Investor participation, product innovations, volume growth is likely to be in exponential proportion. Our company is well poised to build a great institution in India to service the Indian and global investors for their financial services needs The company has created a strong organization driven by processes to handle multifold volume growth. Do not disturb: To service our clients and aide them in wealth creation process, we at Asit C Mehta Investment Interrmediates Ltd. keep on sending information about our products and services, information related to capital market investment, etc. This information might be sent / conveyed to you via letter, newsletter, email, phone; SMS, etc. based on our assumption that you would need this information and benefit you in your wealth creation HRIHE, HASSAN Page 42
  43. 43. “EMPHERICAL TESTING OF CAPM” process. But, at times, you might need privacy and wish us not to contact you for such information. We would take the precaution and see not to disturb you by excluding your contact details from our marketing list. Kindly provide your details so as to not disturb you. Message Board: Welcome to our new website! We are pleased to announce some exciting new features, an improved user-friendly design and services to benefit our esteemed customers. We have also taken steps to ensure faster loading of pages.  User-friendly design: No part of the website is more than three clicks away. This ensures speedy access to whatever information you may need.  Easy Trading: We have two options for trading: Quick Trade and Regular Trade. Quick Trade enables you to transact in any share quickly by presenting only the most relevant information. Regular Trade gives you full information about the share, enabling you to take an informed decision.  New features: We've added some exciting new features like Advise Me and Online Purchase of Mutual Funds and IPOs. Knowledge Center: Investor Education and Empowerment is essential for inculcating correct investment habits. We undertake various initiatives to educate investors and enable them to make informed investment decisions based on their investment profiles, risk appetites, and return expectations. Three important parts of our Investor Education and Awareness Program are: Market Wisdom series, Video broadcasts of Investment Education Topics, and the Nucleus Investmentz newsletter. We also conduct activities such as seminars, exhibitions, etc.  Investor Education Topics HRIHE, HASSAN Page 43
  44. 44. “EMPHERICAL TESTING OF CAPM” We have been conducting the Investor Education and Awareness program via video broadcasts through our own network (branches and business associates), which is spread over 600 locations across 25 states and union territories in India. Speakers with industry expertise participate in video broadcasts from our head office in Mumbai, which is accessible from any of our branches across the country. The last session was on February 21, 2009; our expert in-house fundamental and technical research team conducted an investor education program on crude oil market outlook.  Nucleus Investments. For the past seven years, we have been publishing a fortnightly newsletter, Nucleus Investmentz. It includes analyses of current financial topics, insights on investment- relevant topics, and performance score cards of various mutual funds. This is available in English, Hindi & Gujarati. Benefits of Trading With Us:  Focus on wealth creation for the investors.  Client Level Risk Management.  Auto Pay-in / Payout of securities.  Transfer of payout directly to the designated customer bank account. .  Account & Portfolio information through Internet 24x7, 365 days.  Strong foundation of Technology, Compliance and Transparency First corporate member of the Bombay Stock Exchange Proven track record for the last 25 years in the stock broking industry First broking house to gain the ISO 9001:2000 certification Presence in 23 states and 650 locations. HRIHE, HASSAN Page 44
  46. 46. “EMPHERICAL TESTING OF CAPM” DESIGNATION NAME Chairman and Managing Director Mr. Asit C. Mehta Chief Executive Officer Mrs. Deena Asit Mehta Whole-Time Director Mr. Kirit H Vohra Chief Operating Officer Mr. Kirit H Vohra Chief Technological Officer Mr. Kamal Goel Chief Officer Wealth centre Mr. T .S Netrajan Chief Manager Co-operative commodities Mr. Vidia Chief Financial Manager Mr. Veerendra Thakur Chief Officer Human Resources Mr. V. Vishvanath Senior Vp Operation Mr. T .S Netrajan Unit Manager Mr. B.P Shanthish HRIHE, HASSAN Page 46
  47. 47. “EMPHERICAL TESTING OF CAPM” 3.04 ACHIEVEMENTS: ACHIEVEMENTS OF ASIT C MEHTA INVESTMENT INTERMEDIATES LIMITED.  Having secured brokerage grading of BQ1 from CRISIL of India. (Top Most Grading given to any Good Broking House) It has been marked as a very good broking house as regards to all the criteria given by CRISIL of India. In previous year it was in the BQ2 grade, but looking at the workings and very good Risk management system of the company, it has been upgraded to BQ1  It is an ISO 2000-9001 company.  Making a very good turnover and giving directly and indirectly appointment for more than 2500 people in India. It has got more than 600 branches network all over India covering all most all states in India.  To become the very old brokerage house in India and getting incorporated in the year 1984 got the BSE membership card at the early stages.  Having its leadership position in equity broking, equity research, forex and commodity markets & mutual funds.  Holding an equity brand of investments.  Now serving around 2lakhs clients all over India and abroad. (NRIs). HRIHE, HASSAN Page 47
  48. 48. “EMPHERICAL TESTING OF CAPM” 3.05 SWOT ANALYSIS: SWOT analysis refers to; analyzing the strength, weakness, opportunity and threat of the organization SWOT is a compound of two factors namely external factors and Internal factors. Strengths and weaknesses are the internal factors controlled by the technical and personnel departments. Opportunities and threats are the external factors, which cannot be controlled by the company. External factors may include political factors, Socio –Cultural factors, Technical factors, demography, and Environmental factors. HRIHE, HASSAN Page 48
  49. 49. “EMPHERICAL TESTING OF CAPM” STRENGTHS:  One of the fastest growing brokerage firms in India.  Rich experience of wealth creation.  Robust technology with online trading facility.  Swift response to market dynamics.  Customer first support team.  Handheld/mobile feeds and SMS update. HRIHE, HASSAN Page 49
  50. 50. “EMPHERICAL TESTING OF CAPM”  It has well experienced staff and good infrastructure. WEAKNESS:  Less number of branches in south India.  Unable to compete with the brokerage rates of their competitors.  Lack of efficient and effective strategies in attracting customers.  Unable to market their products & services more efficiently. OPPORTUNITIES:  Growing India economy opens up huge market for stock broking companies.  Increase the resource mobilization by mutual funds.  Introduction of new technologies leads to trapping new markets.  Company is committed to achieve profitable progress consistently.  Targeting rural and sub urban areas. THREAT:  Facing Increased level of competition.  Uncertainty in the market.  Changes in government polices and regulation.  Falling brokerage rates & the entry of several big players. HRIHE, HASSAN Page 50
  53. 53. “EMPHERICAL TESTING OF CAPM” DATE OPENING PRICE CLOSING PRICE MARKET RETURN JAN-05 1880.35 1809.75 -0.03755 FEB-05 1809.3 1800.3 -0.00497 MAR-05 1798.35 1771.9 -0.01471 APR-05 1771.45 1796.1 0.013915 MAY-05 1796.1 11483.6 -0.17399 JUN-05 1483.9 1505.6 0.014624 JUL-05 1506.65 1632.3 0.083397 AUG-05 1631.55 1631.75 0.000123 SEP-05 1631.1 1745.5 0.069743 OCT-05 1744.4 1786.9 0.024364 NOV-05 1787.3 1958.8 0.095955 DEC-05 1960.75 2080.0 0.061074 TABLE- 4.02 FOR THE YEAR 2006 DATE OPENING PRICE CLOSING MARKET RETURN PRICE JAN-06 2080 2057.6 -0.01077 HRIHE, HASSAN Page 53
  54. 54. “EMPHERICAL TESTING OF CAPM” FEB-06 2057.75 2103.25 0.022112 MAR-06 2103.1 2035.65 -0.03207 APR-06 2035.9 1902.5 -0.06552 MAY-06 1903.1 2087.55 0.096921 JUN-06 2087.8 2220.6 0.063608 JUL-06 2220.45 2312.3 0.041365 AUG-06 2312.5 2384.65 0.031401 SEP-06 2384.7 2601.4 0.090871 OCT-06 2601 2370.95 -0.08845 NOV-06 2366.8 2653.25 0.121028 DEC-06 2651.6 2836.55 0.06975 HRIHE, HASSAN Page 54
  55. 55. “EMPHERICAL TESTING OF CAPM” TABLE – 4.03 FOR THE YEAR 2007 DATE OPENING CLOSING MARKET RETURN PRICE PRICE JAN-07 2835.95 3001.1 0.058234 FEB-07 2971.55 3074.7 0.034713 MAR-07 3123.1 3402.55 0.089478 APR-07 3473.3 3557.6 0.024271 MAY-07 3605.45 3071.05 -0.14822 JUN-07 2962.25 3128.2 0.056022 JUL-07 3150.95 3143.2 -0.00246 AUG-07 3149.8 3413.2 0.083847 SEP-07 3435.15 3588.4 0.044612 OCT-07 3569.6 3744.1 0.048885 NOV-07 3767.05 3954.5 0.04976 DEC-07 3997.6 3966.4 -0.0078 HRIHE, HASSAN Page 55
  56. 56. “EMPHERICAL TESTING OF CAPM” TABLE -4.04 FOR THE YEAR 2008 DATE OPENING PRICE CLOSING PRICE MARKET RETURN JAN-08 1058.85 1075.4 0.01563 FEB-08 1076.95 1142.05 0.060448 MAR-08 1142.05 1129.55 -0.01095 APR-08-08 1129.85 1084.5 -0.04014 MAY-08 1084.8 1028.8 -0.05162 JUN-08 1029.25 1057.8 0.02739 JUL-08 1058 958.9 -0.09367 AUG-08 959.2 101.6 0.053586 SEP-08 1010.9 963.15 -0.04724 OCT-08 961.15 951.4 -0.01014 NOV-08 951.45 1050.15 -0.103736 DEC-08 1050.15 1093.5 0.04128 HRIHE, HASSAN Page 56
  57. 57. “EMPHERICAL TESTING OF CAPM” TABLE -4 .05 FOR THE YEAR 2009 DATE OPENING PRICE CLOSING PRICE MARKET RETURN JAN-09 1093.6 1041.85 -0.04732 FEB-09 1040.25 1063.4 0.022254 MAR-09 1063.55 978.2 -0.08025 APR-09 977.4 934.05 -0.04435 MAY-09 930.9 1066.8 0.145988 JUN-09 1006.85 1134.15 0.126434 JUL-09 1133.95 1185.85 0.045769 AUG-09 1185.8 1356.55 0.143996 SEP-09 1356.7 1417.1 0.04452 OCT-09 1416.6 1555.9 0.098334 NOV-09 1556.5 1615.25 0.037745 DEC-09 1615.85 1879.75 0.16332 HRIHE, HASSAN Page 57
  58. 58. “EMPHERICAL TESTING OF CAPM” TABLE – 4.06 MARKET RETURNS YEAR RETURN RETURN+1 2005 0.106443 1.106443 2006 0.363726 1.363726 2007 0.3986 1.3986 2008 0.032724 1.032724 2009 0.718864 1.718864 RETURN = 1.3023 – 1 Therefore Expected Return On Market is = 30.23 or 30% HRIHE, HASSAN Page 58
  59. 59. “EMPHERICAL TESTING OF CAPM” OVERVIEW OF WIPRO TECHNOLOGIES LTD: An INDUSTRY (from Latin industries, "diligent, industrious") is the manufacturing of a good or service within a category.[1] Although industry is a broad term for any kind of economic production, in economics and urban planning industry is a synonym for the secondary sector, which is a type of economic activity involved in the manufacturing of raw materials into goods and products.[1] There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction, and manufacturing; the tertiary sector, which deals with services (such as law and medicine) and distribution of manufactured goods; and the quaternary sector, a relatively new type of knowledge industry focusing on technological research, design and development such as computer programming, and biochemistry. A fifth quandary sector has been proposed encompassing nonprofit activities. The economy is also broadly separated into public sector and private sector, with industry generally categorized as private. Industries are also any business or manufacturing. Industry in the sense of manufacturing became a key sector of production and labor in European and North American countries during the Industrial Revolution, which upset previous mercantile and feudal economies through many successive rapid advances in technology, such as the steel and coal production. It is aided by technological advances, and has continued to develop into new types and sectors to this day. Industrial countries then assumed a capitalist economic policy. Railroads and steam-powered ships began speedily establishing links with previously unreachable world markets, enabling private companies to develop to then-unheard of size and wealth. Following the Industrial Revolution, perhaps a third of the world's economic output is derived from manufacturing industries—more than agriculture's share. Many developed countries (for example the UK, the U.S., and Canada) and many developing/semi-developed countries (People's Republic of China, India etc.) depend significantly on industry. Industries, the countries they reside in, and the economies of those countries are interlinked in a complex web of interdependence. HRIHE, HASSAN Page 59
  60. 60. “EMPHERICAL TESTING OF CAPM” WIPRO TECHNOLOGIES LTD TABLE – 4.07 FOR THE YEAR 2005 Date Opening price Closing price Returns Market returns Jan-05 1752 1588.8 -0.110274 -0.03755 Feb-05 1558.8 1454.44 -0.066949 -0.00497 Mar-05 1480 1361.2 -0.080270 -0.01471 Apr-05 1358 1545.85 0.138328 0.013915 May-05 1600 1523.7 -0.047687 -0.17399 Jun-05 1541.65 532.1 -0.6548450 0.014624 Jul-05 534 546.85 0.024064 0.083397 Aug-05 548 578.5 0.055657 0.000123 Sep-05 577 596.8 0.034315 0.069743 Oct-05 600 657.5 0.095833 0.024364 Nov-05 660 766.4 0.277333 0.095955 Dec-05 766 748.8 -0.022454 0.061074 HRIHE, HASSAN Page 60
  61. 61. “EMPHERICAL TESTING OF CAPM” WIPRO TECHNOLOGIES LTD TABLE – 4.08 FOR THE YEAR 2006 Date Opening price Closing price returns Market returns Jan-06 377.5 352.67 -0.065775 -0.01077 Feb-06 355 349.75 -0.014789 0.022112 Mar-06 350 335.98 -0.040057 -0.03207 Apr-6 337 315.4 -0.064095 -0.06552 May-6 319.5 357.88 0.120125 0.096921 Jun-06 358.5 383.15 0.068759 0.063608 Jul-06 375 368.17 -0.018213 0.041365 Aug-06 365 364.65 -0.000959 0.031401 Sep-06 369 371.45 0.00664 0.090871 Oct-06 375.2 364.6 -0.028252 -0.08845 Nov-06 369 423.25 0.147019 0.121028 Dec-06 424.8 463.35 0.090749 0.06975 HRIHE, HASSAN Page 61
  62. 62. “EMPHERICAL TESTING OF CAPM” WIPRO TECHNOLOGIES LTD TABLE – 4.09 FOR THE YEAR 2007 Date Opening price Closing price returns Market returns Jan-07 462 529.7 0.146537 0.058234 Feb-07 530 520.2 -0.018491 0.034713 Mar-07 520 559.7 0.076346 0.089478 Apr-07 565 538.55 -0.046814 0.024271 May-7 545 449.7 -0.174862 -0.01482 Jun-07 452 513.35 0.13573 0.056022 Jul-07 517.4 490.5 -0.051991 -0.00246 Aug-07 490 518.65 0.058469 0.083847 Sep-07 519 524.9 0.011368 0.044612 Oct-07 524.9 538.3 0.025529 0.048885 Nov-07 541 599.9 0.108872 0.04976 Dec-07 604.95 605.9 0.00157 -0.0078 HRIHE, HASSAN Page 62
  63. 63. “EMPHERICAL TESTING OF CAPM” WIPRO TECHNOLOGIES LTD TABLE- 4.10 FOR THE YEAR 2008 Date Opening price Closing price returns Market returns Jan-08 603 613.25 0.016001 0.01563 Feb-08 624.8 562.4 -0.099872 0.060448 Mar-08 577.7 559.4 -0.031677 -0.01095 Apr-08 559.6 571.6 0.021444 -0.04014 May-08 635 543.7 -0.143780 -0.05162 Jun-08 548.4 518.45 -0.054613 0.02739 Jul-08 515 497.35 -0.034272 -0.09367 Aug-08 491.1 482.35 -0.017817 0.053586 Sep-08 486 460.25 0.055948 -0.04724 Oct-08 462 507.15 0.097727 -0.01014 Nov-08 509.95 460.65 -0.220492 -0.103736 Dec-08 465 525.65 0.130430 0.04128 HRIHE, HASSAN Page 63
  64. 64. “EMPHERICAL TESTING OF CAPM” WIPRO TECHNOLOGIES LTD TABLE- 4.11 FOR THE YEAR 2009 Date Opening price Closing price returns Market returns Jan-09 529.05 422.75 -0.200926 -0.04732 Feb-09 430.05 437.05 0.016277 0.022254 Mar-09 429.85 432.1 0.005234 -0.08025 Apr-09 430 488.75 0.136628 -0.04435 May-09 490 509.25 0.039286 0.145988 Jun-09 509.25 439.95 -0.136082 0.126434 Jul-09 438 415.4 -0.051598 0.045769 Aug-09 410 432.4 0.054634 0.143996 Sep-09 430 339.9 -0.209535 0.04452 Oct-09 321.6 272.65 -0.152208 0.098334 Nov-09 284 242.65 -0.145598 0.037745 Dec-09 235.55 233.4 -0.009128 0.16332 OVERVIEWS OF INFOSYS TECHNOLOGIESLTD: HRIHE, HASSAN Page 64
  65. 65. “EMPHERICAL TESTING OF CAPM” Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. Today, we are a global leader in the "next generation" of IT and consulting with revenues of over US$ 4 billion. Infosys defines designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers. Infosys' offerings span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re- engineering, independent testing and validation services, IT infrastructure services and business process outsourcing Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk. Infosys has a global footprint with over 50 offices and development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys has over 103,000 employees. Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers. HRIHE, HASSAN Page 65
  66. 66. “EMPHERICAL TESTING OF CAPM” INFOSYS TECHNOLOGIES LTD TABLE -4.12 FOR THE YEAR 2005 Date Opening price Closing price Returns Market Returns Jan-05 5598 5212.8 -0.069 -0.0375 Feb-05 5240 5062.5 -0.034 -0.005 Mar-05 5098 4938.2 -0.031 -0.0147 Apr-05 4951.1 5146.2 0.0394 0.031392 May-05 5071.1 5200.9 0.0256 -0.174 Jun-05 5201.6 5524.1 0.062 0.01462 Jul-05 1395 1553.5 0.1136 0.0834 Aug-05 1550 1575.5 0.0165 0.00012 Sep-05 1575 1695.5 0.0765 0.06974 Oct-05 1735 1096.4 0.0988 0.02436 Nov-05 1908 2149.2 0.1264 0.09596 Dec-05 2150 2091.7 -0.027 0.06107 HRIHE, HASSAN Page 66
  67. 67. “EMPHERICAL TESTING OF CAPM” INFOSYS TECHNOLOGIES LTD TABLE -4. 13 FOR THE YEAR 2006 Date Opening price Closing price Returns Market Returns Jan-06 2119 2608.7 0.2311 -0.108 Feb-06 2070 2240.1 0.0822 0.0221 Mar-06 2240 2257.2 0.0077 -0.032 Apr-06 2259.6 1886.8 -0.165 -0.066 May-06 1987 2250.5 0.1326 0.0969 Jun-06 2255 2358.3 0.0458 0.0636 Jul-06 2345 2268.5 -0.033 0.0414 Aug-06 2202 2376.1 0.0791 0.0314 Sep-06 2402.1 2515.3 0.0471 0.0909 Oct-06 2525 2522 -0.001 -0.088 Nov-06 2550 2684.5 0.0527 0.121 Dec-06 2690 2996.9 0.1141 0.0698 HRIHE, HASSAN Page 67
  68. 68. “EMPHERICAL TESTING OF CAPM” INFOSYS TECHNOLOGIES LTD TABLE – 4.14 FOR THE YEAR 2007 Date Opening price Closing price Returns Market Returns Jan-07 1503.5 1440.2 -0.042 0.0582 Feb-07 1443 1425.3 -0.012 0.0347 Mar-07 1409.5 1490.7 0.0576 0.0895 Apr-07 1500 1588.7 0.0591 0.0243 May-07 1588.5 1454.9 -0.084 -0.015 Jun-07 1474.5 1539.5 0.0441 0.056 Jul-07 1542.5 1655.6 0.0733 -0.002 Aug-07 1650 1806.4 0.0948 0.0838 Sep-07 1810 1849.7 0.0219 0.0446 Oct-07 1875 2095.5 0.1176 0.0489 Nov-07 2096 2179.7 0.0399 0.0498 Dec-07 2189 2241.5 0.024 -0.008 HRIHE, HASSAN Page 68