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The main idea of this research was to create a system by which a layman could time his entry and exit in the stock market. To time the entry and exit a system was needed which could indicate whether the market is over or under-valued. This was determined by calculating implied growth rate of a Market Index which would justify the level of Index (share prices of all the companies comprising that index), considering the trailing twelve months ‘earnings per share’ and their cost of equity individually.
Implied growth rate for Sensex was calculated for the period from June 2008 to January 2011. According to that the Indian equity markets are overvalued at 20022 points. The correct value of Sensex should be at around 14589.
This model can also be used as a market timing tool using mean +/- standard deviation as exit and entry points. Upon testing it for the above stated period it gave better returns than long term investing for the same period.