Historical Returns And Risk Of Selected Psu Stocks Finance Essay

Abstraction

The survey aims to measure the public presentation of single selected PSU stocks of banking and non-banking sector listed on the National Stock Exchange ( Allahabad Bank, Dena Bank, Oriental Bank of Commerce, UCO Bank, Dredging Corporation of India Ltd, NALCO, NTPC, MMTC and ONGC ) . An in-depth survey of assorted fiscal tools like Alpha, Beta, Standard Deviation and Sharpe ‘s ratio are used. The returns for each of the above stocks and the CNX PSE index are calculated on day-to-day footing for the period 2007-10. The consequences of the survey will be helpful for the investors and research workers who wish to put in public sector, big capitalized stocks. Deliberate consequences are in favor of banking sector PSU portfolio instead than a diversified portfolio. This suggests that investors who are non risk averse should instead put in a banking portfolio of PSU stocks in the long term.

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Portfolio theory was originally proposed by Harry Markowitz in the fiftiess that made an effort to quantify the hazard of a portfolio and developed a methodological analysis for finding the optimum portfolio. He concluded that the expected return on a portfolio is the leaden norm of the expected returns on the single securities in the portfolio whereas the portfolio hazard is affected by the standard divergence of the returns every bit good as the correlativity coefficients among security returns. The co-movement between the returns of securities is measured by covariance and coefficient of correlativity. The coefficient can change between +1 and -1. Once the efficient frontier and the risk-return indifference curves are mapped, the optimum portfolio is found at the tangency between the efficient frontier and a public-service corporation indifference curve. The job with this theoretical account was that it required huge informations as it required n ( n-1 ) /2 covariance footings if there were n securities. To get the better of this William Sharpe developed the Capital Asset Pricing Model which requires 3n+2 estimations. The capital plus pricing theoretical account explained the relationship between hazard and return for an efficient portfolio and that of between hazard and return for an single security. For efficient portfolios the relationship between hazard and return is depicted by the consecutive line. The incline of the line i.e beta of the security is used to mensurate the systematic hazard.

PSU existence has become rather important in the stock market. The aggregative market capitalization of the 37 PSUs has increased by Rs 5 hundred thousand crore, ( 68.7 % ) from January 1, 2009 till the terminal of November 2009. From Rs 7.32 hundred thousand crore as on January 1, 2009 it has risen to Rs 12.35 hundred thousand crore on November 30, 2009. The PSUs now account for about 30 % of the market capitalization of the entire existence of listed companies in India. Other than the planetary meltdown that adversely affected non province supported companies, the increased bulk with which the UPA came back in the 2nd term besides increased the value of these companies. The divestment programme of the authorities besides affected these stocks and the portions of PSU stocks started appreciating. Alongwith ONGC which was the numero uno in footings of market capitalisation, the other taking stocks during the period were NTPC, MMTC, Engineers India, BEML, Hindustan Copper, STC, SAIL, Bharat Electronics, Neyveli Lignite, NMDC and GAIL.

The present paper focuses on the analysis of some taking PSU stocks on the footing of market capitalisation. It compares returns of banking stocks and non-banking stocks largely belonging to the excavation and energy sector. The banking sector is taken since it represents the economic growing of the state.

Reappraisal of literature

Numerous surveies have found grounds of a strong relationship between the hazard and return of a portfolio. Ronald J Surz used mean allotment, return variableness, income output and beta as a step of hazard for measuring portfolio public presentation. Craig W. French, 2002 probed and concluded that the expected output to the investor is the amount of return on his capital at hazard free loaning rate and an expected return for hazard taking which depends merely on the hazard taken and is independent of his capital.

In a paper in the February, 1958, Review of Economic Studies James Tobin introduced the construct of laterality. Tobin envisioned an investor who was free to choose his portfolio from a set of hazardous assets and one riskless plus – hard currency. He showed that one set of comparative proportions of the hazardous assets would rule all other possible combinations in the sense that for any given degree of hazard it gave the investor “ the highest possible outlook of return available to him at that degree of hazard ” .

Claudio Boido and Giovanni Fulei did a survey on “ A hazard part attack to plus allotment ” . As per this, fringy part to put on the line attack is used where given the portfolio entire hazard degree, ‘no skill weights ‘ or ‘neutral weights ‘ can be represented by those who realize hazard budgeting characterized by maximal variegation of the downside hazard. This consequence is obtained by equalising the fringy hazard part of the individual assets in the portfolio.

Mebane T. Faber in “ A Quantitative Approach to Tactical Asset Allocation ” tested a non discretional trendsetting theoretical account on assorted markets and concluded that using a monthly system since 1973, an investor would hold been able to increase hazard adjusted returns by diversifying portfolio assets and using a market clocking solution.

Eugene F Fama and Kerneth R French ( 2004 ) concluded that the version of the CAPM developed by Sharpe ( 1964 ) and Lintener ( 1095 ) has ne’er been an empirical success since the relation between beta and mean return is flatter than predicted by the Sharpe-Lintener version of the CAPM. Even passively pull off financess which concentrate on low beta stocks tend to bring forth positive unnatural returns. However, the cardinal anticipations of the Black version of the CAPM, that market betas suffice to explicate expected returns and that the hazard premium for beta is positive seem to keep.

Fischer Black and Michael C Jensen grouped securities into portfolios in such a manner that the portfolios had a big spread in their betas. Contrary to the anticipations of the traditional signifier of the theoretical account, high beta securities had significantly negative intercepts and low beta securities had significantly positive intercepts.

Amit Joshi in his survey on the stocks of two sectors concluded that the systematic hazard of the banking sector was lower than portfolio of existent estate sector and portfolio of both the sectors.

Research Aims

The present survey purposes to analyze the stocks of selected populace sector companies viz. Allahabad Bank, Dena Bank, Oriental Bank of Commerce, UCO Bank, Dredging Corporation, NALCO, NTPC and ONGC. The research aims of the survey are as follows:

To analyze the historical returns and hazard of selected PSU stocks.

To make a public presentation rating of the two portfolios-one with lone banking PSU stocks and the other with non banking PSU stocks, fundamentally metal & A ; energy sector companies.

To compare the returns and volatility of a portfolio of choice banking companies and a portfolio of non banking companies.

Research methodological analysis

Eight selected PSU stocks are selected based on dramatic growings in market capitalisation in the past three old ages. Four of the above are from the banking sector, whereas the remainder are from the nonbanking sector ( metal and energy ) . The present research work is a survey of analysing the eight public sector companies of banking, metal and energy sectors by utilizing portfolio direction techniques. Assorted parametric quantities would be used to determine as to how the scrips have moved historically. The single returns every bit good as the portfolio return are calculated on the footing of day-to-day shuting monetary values of the sample stocks and CNX PSE index taken from nseindia.com. The portfolio returns of the portfolio of sample banking PSU stocks and portfolio of sample non banking stocks are besides compared. The hazard of the above two portfolios every bit good as the single security hazards are calculated and analysed. The single hazards every bit good as the portfolio hazards are evaluated with tools like standard divergence and systematic hazard. It has been assumed that equal proportion is being invested in each scrip of the portfolio.

Research Tools

PSE index whereas the returns taken for the survey are day-to-day returns from April 1, 2007 to March 31, 2010. The market return is the return of the CNX PSE index. The single scrip return is calculated by the undermentioned expression.

Rj=log ( Pt-Pt-1 )

Return premium is the existent return minus the hazard free rate of return. The hazard free rate is taken as the leaden mean 91day exchequer measure return in this survey ( 5.88 % ) .

Beta ( incline ) in the CAPM is the step of systematic hazard and it is the ratio of covariance between market return and the security ‘s return to the market return discrepancy. Alpha ( intercept ) is the return of a peculiar security when the market return is zero. It is the sensitiveness to market motions and is the incline of the arrested development line of portfolio return premiums against market return premiums. The individual index theoretical account developed by William Sharpe states that:

Rj= alpha+ Beta ( Rm ) + ej where vitamin E represents the error term and is considered as nothing.

Standard divergence measures the volatility in the stock monetary values and is a tool to happen the fluctuation in the monetary values in any security. Higher the standard divergence, higher is the volatility.

The correlativity coefficient reflects the grade of co-movement between two variables. This can change between +1 and -1.

Sharpe ratio is used to analyse the relationship between the portfolio ‘s extra return over the hazard free return and entire hazard of the portfolio measured in footings of standard divergence.

Interpretation

a ) Performance Evaluation of stocks

After tabling the day-to-day shutting NSE monetary values of the eight companies under study for the three old ages stoping 31, March 2010, their average returns are calculated. While measuring single securities, the annualized average return of UCO Bank was the highest followed by Dena Bank and NALCO. Table 1 reveals the values of average returns, Beta, Alpha and standard divergence of single stocks of the sample. Using the market theoretical account, the return of a security when the market return is zero ( alpha ) is calculated and found to be highest for UCO Bank followed by Dena Bank. The same was calculated and found to be negative for ONGC. The alpha values are shown in diagram1.

degree Celsiuss ) Comparison of the banking and non-banking portfolios

The survey assumes that equal proportion is being invested in the stocks of the portfolio. The annualized mean return of the non banking portfolio ( 36.5 % ) is less than the mean return of the banking portfolio ( 62.05 % ) . The intercept of the banking portfolio was.09 whereas the intercept of the other portfolio was 0.02. This proves that when the market returns is zero the returns of the banking portfolio was better than the returns of the non-banking portfolio. While comparing portfolio hazard, it was found that the banking portfolio was more hazardous than the non-banking portfolio. The annualized standard divergence of the nonbanking portfolio ( 46.25 ) was less than that of banking portfolio ( 65.34 ) . The systematic or the concern rhythm hazard as measured by beta is less than 1 for all the portfolios studied. This indicates that the portfolios are less volatile than the index. The correlativity coefficient of the banking portfolio with the CNX PSE index was -0.72 and of non banking portfolio was -0.89. The risk-adjusted return of the banking portfolio ( 0.86 ) was better than that of non-banking portfolio ( .66 ) . It is besides deduced that Sharpe ratio is in favor of banking sector portfolio. It is seen that good diversified portfolio made by puting in different sectors provided less return than banking stocks portfolio.

Decision

Securities taken in the sample, holding higher hazard as measured by standard divergence have shown higher returns besides. The decision is therefore in line with the Capital Asset Pricing Model. UCO Bank in the banking portfolio and Dredging Corporation in the non banking portfolio have highest hazards and highest returns. Besides, the portfolio which had higher return had higher hazard. It would be good for investors to put in the taking PSU stocks based on market capitalisation since the portfolio is less volatile than the benchmark index ( CNX Nifty ) .

The survey concluded that banking sector portfolio gave better returns than the entire portfolio whereas the returns of the non-banking portfolio and portfolio of all the stocks gave similar returns. Returns per unit of hazard besides favour the banking stocks portfolio of PSU stocks. The portfolio chosen is less volatile than the index. The non risk-averse investors are therefore recommended to travel in for banking sector portfolio of PSU stocks in the long tally since the hazard adjusted return per unit of hazard is much higher than the other portfolios studied. The survey besides concludes that hazard can be reduced by diversifying the portfolio since the standard divergence of the portfolio was lower than standard divergence of all single stocks studied.

Restrictions

The stocks taken for the survey are the most active PSU stocks in footings of addition in market capitalisation during the period under survey but they may non be good represented in footings of different sectors. The sample size may be a confining factor. The premise of no revenue enhancements and dealing costs may non correctly gauge the returns

Using day-to-day returns increases the figure of observations but introduces a prejudice due to nontrading. Historical beta as a step of past hazard may non be a good calculator of future hazard since a company ‘s beta may alter over clip.

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