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8/8/2019 IIPM Project Analysis
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Investment Analysis
&
Portfolio Management
PGDM 2009-11
Project Report
On
Efficiency of Small Stocks
with respect to risk & return
Prepared By: Submitted to:
Hunish Kumar (20) Dr. P.K.Aggarwal
Kamiya Rautela (22) Finance Faculty
Pankaj Aggarwal (34) IILM-CMS
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Acknowl d nt
We want t express our sincere appreciation and gratitude to all t ose who have directl or
indirectl helped and contri uted towards the completion ofthis report
We would li e to thank Dr. P.K.Aggarwal, AHL-IILM-CM , Greater Noida for his constantguidance and support throughout this report. His knowledge and experience motivated us
towards the deep study of share market. During the report, we realized that the degree of
relevance and efficiency of small stocks in the current scenario is very high.
In our daily life, we observe thatthe share prices of small companies fluctuate more. Allthis
devoted ourinterestto study the efficiency of small stocks in case of risk and return. Allthese
have resulted in the enrichment of our knowledge and his inputs have hel ped us to
incorporate relevantissues into our project.
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Small CapStocks
Companies that have small capitalization i.e. between $300 million to $2 billion are
considered small companies or smaller quoted companies (SQCs) and are sometimes called
small caps. The stocks from these companies are known as small cap stocks.
Scaling Up
Small-cap stocks are often cited as good investments due to theirlow valuations and potential
to grow into big-cap stocks, butthe definition of small cap has changed overtime. What was
considered a big-cap stockin 1980 is a small-cap stocktoday.
In the stock market, company size is measured not by number of employees or even by size
of profits, but rather by a company's market capitalization. While this seems complicated,it
really gives the best idea of the size of a company. Market capitalization is calculated by
considering the number of outstanding shares or the number of shares in issue. This number
is multiplied by the current price of each share. Basically,the number of shares available is
multiplied by the current price to get a value of the price of the company on the market.
Companies that have small capitalization amounts are considered small companies or smaller
quoted companies (SQCs) and are sometimes called small caps. The stocks from these
companies are known as small cap stocks.
What is considereda small capitalization and what is consideredlarge varies widel ?
In the United States, a company with a market capitalization of $300 million to $2 billion is
often considered small cap. Small cap stocks picks are attractive to amateur investors and
those who have budgetary constraints as these stocks can be priced as low as $5. Even if you
do not have a lot of money to spend, you may be able to afford investmentin small cap value
stocks. Since the best small cap stocks can sometimes double or even triple in value, smallcap does not have to mean small profits forthe investor who knows what he or she is doing.
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Ranking Caps
The definition of big/large cap and small cap differs slightly in the brokerage houses and has
changed over time. The differences between the brokerage definitions are relatively
superficial and only matter for the companies that lie on the edges. The classification is
important for borderline companies because mutual funds use itto determine which stocks to
buy.
The current approximate definitions are as follows:
1. Mega Cap - Market cap of $200 billion and greater
2. Big Cap - $10 billion to $200 billion
3. Mid Cap - $2 billion to $10 billion
4. SmallCap - $300 million to $2 billion5. Micro Cap - $50 million to $300 million
6. Nano Cap - Under $50 million
These categories have increased overtime along with the marketindexes. In the early 1980s,
a big-cap stock had a market cap of $1 billion. Today that size is viewed as small. It remains
to be seen ifthese definitions also deflate when the market does.
Small-cap stocks have a bad reputation. The media usually focuses on the negative side of
small caps, saying they are risky, frequently fraudulent and lacking in quality those investors
should demand in a company. Certainly these are all valid concerns for any company, butin
the wake ofthe Enron and WorldCom scandals,there is certainly an argumentthat company
size is by no means the only factor when it comes to getting scammed. In this article we'lllay
out some of the most important factors comprising the good and the bad of the small-cap
universe. Knowing these factors you will be better able to decide whether investing in
smaller-capitalized companies is right for you.
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Backgroundabout Small Cap
Before we get into the pros and cons of small caps let's just recap (no pun intended) what
exactly we mean by small cap. The term refers to stocks with a small market capitalization,
between US$250 million and $2 billion. Stocks with a market cap below $250 million are
referred to as micro caps, and those below $50 million are called Nano caps. Small-cap
stocks can trade on any exchange although a majority ofthem are found on the NASDAQ or
the OTCBB because of more lenient listing requirements. It is important to make the
distinction between small caps and penny stocks, which are a whole different ball game. You
can be a small cap without being a penny stock. There are plenty of small caps trading at
more than $1 per share, with more liquidity than the average penny stock.
The Pros
When you are eyeing small-cap stocks, a number of positive factors weigh against some
negative attributes. Below we have outlined three ofthe most compelling reasons why small
caps deserve representation in many investors' portfolios.
1) Huge growth potential
Most successfullarge-cap companies started at one time as small businesses. Small caps give
the individual investor a chance to get in on the ground floor. Everyone talks about finding
the next Microsoft, Wal-Mart or Home Depot, because at one point these companies were
small caps, diamonds in the rough if you will.
2) Most mutual funds don't invest in them
Itisn't uncommon for mutual funds to invest hundreds of millions of dollars in one company.
Most small caps don't have the market cap to supportthis size of investment. In orderto buy
a position large enough to make a difference to their fund's performance, a fund manager
would have to buy 20% or more of the company. This gives an advantage to individual
investors who have the ability to spot promising companies and getin before the institutional
investors do.
3) They are often under-recognized
This third attribute of small caps is very important. What we are saying here is that small caps
often have very little analyst coverage and garnerlittle to no attention from WallStreet. What
this means to the individual investor is that, because the small-cap universe is so under-
reported or even undiscovered, there is a high probability that small-cap stocks are
improperly priced.
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4) Thin Market
Small caps tend to be thinly traded and, while this is a characteristic that can slice both ways,
it often presents a huge opportunity for shrewd investors. As the company grows its revenues
and earnings overtime and the public becomes more aware ofits existence and future growthprospects, demand for the stock inevitably perks up. And when a large number of investors
startto clamour over a very limited amount of stock,this gives small cap stocks the potential
to rise quite rapidly.
5) Lack of Analyst Coverage
According to First Call, on January 8, 2007, UBSSecurities raised its rating on IBM from
"neutral" to "buy". The stock edged up $1.17 on the news, or about 1%. Butthat move was
nothing compared to what happened on September 6, 2005, when Brean Murray upgraded
Wilson's Leather from "accumulate" to "strong buy". The day the report went outthe shares
moved up roughly 4%, and within a weekthey rose almost 12%.
The Cons
1) Risk
Despite the factthat small caps demonstrate attractive characteristics,there is a flip side. The
money you investin small caps should be money you can expose to a much higher degree of
riskthan that of proven cash-generating machines like large caps and blue chips.
2) Sometimes, Small CapStockis Low priced for aReason
Sometimes, stock falls dramatically in price - and will only continue falling. Often,there is a
reason for this. The company may be nearing economic crisis or may even be close to
bankruptcy. You should only buy small caps if there is a good chance that the price of the
stock will go up.
3) Time
Finding time to uncoverthat small cap is hard work - investors must be prepared to do someserious research, which can prove a deterrent. Financial ratios and growth rates are widely
published forlarge companies, but not for small ones. You must do allthe number crunching
yourself, which can be very tedious and time consuming.
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Overview of the SmallStock Companies
1. ARROW TEXTILES, MAHARASTARA
Category S CATEGOTY SHARE
Main business - Elastic and Non-Elastic Tapes
Market price - Rs 8.9
2. BIRLA POWERSOLUTION, NEW DELHI
Category S CATEGORY SHARE
Main business - The Company is presently producing a wide range of Generators catering tothe power requirements of 500W to 40KW being fuelled by variety of fuel options like
Kerosene , Petrol, Diesel, LPG ,CNG ,Biogas etc
Market price - 2.26
3. GTN INDUSTRIES, HYDRABAD
Category - S CATGORY SHARE
Main business - Vertically integrated manufacturing set-up to produce fine and superfine
cotton yarns, grey knitted fabrics, gassed fabrics, mercerized fabrics and life style garments.
Market price 23.2
4. ZENITH BIRLA, MAHARASTARA
Category S CATEGORY SHARE
Main business pipes manufacturing
Market price-16.05
5. PARAMOUNT COMMUNICATION, VA
Category- S CATEGORY SHARE
Main business -principal activity is to manufacture and distribute a wide range of cables and
wires. It provides complete cabling solutions to almost allthe sectors ofthe economy, such as
power,telecom and,information technology and industrial sector.
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Market price 10.25
6. VINATI ORGANICS, MUMBAI
Category S CATEGORY SHARE
Main business - chemical company producing organic intermediates
Market price - 73.25
7. FORCE MOTORS, PUNE
Category S CATEGORY SHARE
Main business - manufacturing of TEMPO, 3-WHEELERetc
Market price 465.1
8. ANSAL HOUSE AND CONSTRUCTION LTD
Category- S CATEGORY SHARE
Main business - engaged in the entire gamut of civil construction and real estate
development activity in India and abroad
Market price 68.45
9. PANASONIC HOME AND APPLIANCEINDIA COMPANY
Category S CATEGORY SHARE
Main business - engaged in the business of manufacturing,importing, marketing and selling
of kitchen appliances and small domestic appliances.
Market price - 191.7
10. TRANSPEKINDUSTRIES, GUJARAT
Category S CATEGORY SHARE
Main business - manufacturers and exporters of a range of chemicals servicing the
requirements of customers from a diverse range of industries - Textiles, Pharmaceuticals,
Agrochemicals, Polymers, etc.
Market price 119
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Large Stock Companies
1. CASTROL INDIA LTD, MUMBAI
Category - A CATEGORY SHARE
Main business - Manufacturing: Processing of lubricants for the automobile and shipping
industries, including lubricating oils, greases, brake fluids, cable-filling compounds and
jellies.
Market price - 463.95
2. RELIGAREENTERPRISE, NEW DELHI
Category A CATEGORY SHARE
Main business - services in insurance, asset management, broking and lending solutions to
investment banking and wealth management
Market price - 454.70
3. NESTLEINDIA
Category - A CATEGORY SHARE
Main business - variety of food products
Market price - 2803.25
4. BAJAJ HOLDING AND INVESTMENT LTD, MUMBAI
Category A CATEGORY SHARE
Main business - InvestmentCompany
Market price 748.5
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Analysis and Findings ofSmallStocks
1. Arrow textile:
Months Arrow Textile Return (Rs) Nifty Market return (Rm)
Aug 2009 12.39 - 4662.1 -
Sep 2009 9.57 -0.23 5083.95 0.09
Oct 2009 8.62 -0.10 4711.7 -0.07
Nov 2009 8.1 -0.06 5032.7 0.07
Dec 2009 8.46 0.04 5201.05 0.03
Jan 2010 9.04 0.07 4882.05 -0.06
Feb 2010 8.55 -0.05 5017 0.03
Mar 2010 8.17 -0.04 5249.1 0.05
Apr 2010 8.15 0.00 5278 0.01
May 2010 8.07 -0.01 4970.2 -0.06
Jun 2010 12.95 0.60 5312.5 0.07
July 2010 9.02 -0.30 5367.6 0.01
Average Return -0.01 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.08 -0.22 -0.02 0.01 0.048
-0.09 -0.09 0.01 0.01 0.008
0.05 -0.05 0.00 0.00 0.003
0.02 0.05 0.00 0.00 0.003
-0.08 0.08 -0.01 0.01 0.0060.01 -0.05 0.00 0.00 0.002
0.03 -0.04 0.00 0.00 0.001
-0.01 0.01 0.00 0.00 0.000
-0.07 0.00 0.00 0.01 0.000
0.05 0.61 0.03 0.00 0.375
0.00 -0.30 0.00 0.00 0.088
Total 0.02 0.03 0.534
Beta = 0.02/0.03 = 0.52 Risk = Sqrt(0.534/11) = 22.04%
Interpretation:
The first table tells about the average return (-0.01) of the company Arrow Textile which
shows thatthe market value ofthe company share is declining. While the marketindex return
shows the positive return (0.01). The beta value of the company is 0.52 which shows very
less volatility in stock as compared to market. Also there is a huge riskin investing money in
textile industry (Arrow Textile).
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3. GTN Industries
Months GTN Industries Return Nifty Market return
Aug 2009 11.86 4662.10
Sep 2009 12.77 0.08 5083.95 0.09
Oct 2009 9.51 -0.26 4711.70 -0.07Nov 2009 10.31 0.08 5032.70 0.07
Dec 2009 15.90 0.54 5201.05 0.03
Jan 2010 14.30 -0.10 4882.05 -0.06
Feb 2010 15.20 0.06 5017.00 0.03
Mar 2010 14.85 -0.02 5249.10 0.05
Apr 2010 16.55 0.11 5278.00 0.01
May 2010 17.20 0.04 4970.20 -0.06
Jun 2010 25.35 0.47 5312.50 0.07
July 2010 25.45 0.00 5367.60 0.01
Average Return 0.09 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
0.076 -0.016 -0.001 0.006 0.000
-0.088 -0.348 0.030 0.008 0.121
0.054 -0.008 0.000 0.003 0.000
0.019 0.450 0.009 0.000 0.202
-0.076 -0.193 0.015 0.006 0.037
0.013 -0.030 0.000 0.000 0.001
0.032 -0.116 -0.004 0.001 0.013
-0.009 0.022 0.000 0.000 0.000
-0.073 -0.053 0.004 0.005 0.003
0.055 0.381 0.021 0.003 0.145
-0.004 -0.089 0.000 0.000 0.008
Total 0.073 0.032 0.532Beta = 0.073/0.032 Risk = sqrt(0.532/11)
= 2.27 = 21.98%
Interpretation:
The beta value shows that the fluctuation in return ofGTN Industries is 2.27 times more
than the fluctuation in market return. Ifthe investor wants to buy the share, he has to bearthe
risk of 21.98% by getting an average return of 9%.
So, return per unit risk = 9/21.98= +0.409
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4. Zenith Birla
Months Zenith Birla Return Nifty Market return
Aug 2009 19.21 4662.10
Sep 2009 20.17 0.05 5083.95 0.09
Oct 2009 17.79 -0.12 4711.70 -0.07Nov 2009 17.58 -0.01 5032.70 0.07
Dec 2009 23.04 0.31 5201.05 0.03
Jan 2010 19.46 -0.16 4882.05 -0.06
Feb 2010 22.92 0.18 5017.00 0.03
Mar 2010 15.62 -0.32 5249.10 0.05
Apr 2010 18.92 0.21 5278.00 0.01
May 2010 19.92 0.05 4970.20 -0.06
Jun 2010 23.58 0.18 5312.50 0.07
July 2010 17.83 -0.24 5367.60 0.01
Average Return 0.01 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.076 0.037 0.003 0.006 0.001
-0.088 -0.131 0.011 0.008 0.017
0.054 -0.024 -0.001 0.003 0.001
0.019 0.298 0.006 0.000 0.089
-0.076 -0.168 0.013 0.006 0.028
0.013 0.165 0.002 0.000 0.027
0.032 -0.331 -0.011 0.001 0.110
-0.009 0.199 -0.002 0.000 0.039-0.073 0.040 -0.003 0.005 0.002
0.055 0.171 0.009 0.003 0.029
-0.004 -0.256 0.001 0.000 0.066
Total 0.029 0.032 0.409Beta = 0.029/0.032 Risk = sqrt(0.409/11)
= 0.896 = 19.29%
Interpretation:
Itis clear from firsttable thatthe average return on the stock and marketis same (0.01). Thevolatility in stockis less (0.896) as compared to last company stock. The investor has to bear
the risk of 19.29% to get a return of 1%.
Return per unit risk = 1/19.29 = +0.052
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5. Paramount Communication
Months Paramount Comm. Return Nifty Market return
Aug 2009 14.12 4662.10
Sep 2009 12.80 -0.09 5083.95 0.09
Oct 2009 12.26 -0.04 4711.70 -0.07Nov 2009 15.30 0.25 5032.70 0.07
Dec 2009 15.40 0.01 5201.05 0.03
Jan 2010 14.20 -0.08 4882.05 -0.06
Feb 2010 12.31 -0.13 5017.00 0.03
Mar 2010 12.02 -0.02 5249.10 0.05
Apr 2010 13.58 0.13 5278.00 0.01
May 2010 11.97 -0.12 4970.20 -0.06
Jun 2010 11.41 -0.05 5312.50 0.07
July 2010 10.28 -0.10 5367.60 0.01
Average Return -0.02 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.076 -0.071 -0.005 0.006 0.005
-0.088 -0.019 0.002 0.008 0.000
0.054 0.271 0.015 0.003 0.073
0.019 0.029 0.001 0.000 0.001
-0.076 -0.055 0.004 0.006 0.003
0.013 -0.110 -0.001 0.000 0.012
0.032 -0.001 0.000 0.001 0.000
-0.009 0.153 -0.001 0.000 0.023-0.073 -0.096 0.007 0.005 0.009
0.055 -0.024 -0.001 0.003 0.001
-0.004 -0.076 0.000 0.000 0.006
Total 0.019 0.032 0.134Beta = 0.019/0.032 Risk = sqrt(0.134/11)
= 0.59 = 11.02%
Interpretation:
The beta value of 0.59 shows thatthe with a increase/decrease of only 1% in market return,the stock return will fluctuate by 0.59% respectively. The risk in this stock is less as
compared to other stocks butit gives negative return. But a rationalinvestor can think about
it because the chances ofincrementin price are also here.
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6. TranspekIndustries
Months Transpek Ind Return Nifty Marketreturn
Aug 2009 61.45 4662.10
Sep 2009 67.95 0.11 5083.95 0.09Oct 2009 60.30 -0.11 4711.70 -0.07
Nov 2009 61.05 0.01 5032.70 0.07
Dec 2009 61.75 0.01 5201.05 0.03
Jan 2010 63.05 0.02 4882.05 -0.06
Feb 2010 57.80 -0.08 5017.00 0.03
Mar 2010 63.50 0.10 5249.10 0.05
Apr 2010 72.65 0.14 5278.00 0.01
May 2010 72.30 0.00 4970.20 -0.06
Jun 2010 90.10 0.25 5312.50 0.07
July 2010 98.00 0.09 5367.60 0.01
Average Return 0.05 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
0.076 0.058 0.004 0.006 0.003
-0.088 -0.160 0.014 0.008 0.026
0.054 -0.035 -0.002 0.003 0.001
0.019 -0.036 -0.001 0.000 0.001
-0.076 -0.027 0.002 0.006 0.001
0.013 -0.131 -0.002 0.000 0.017
0.032 0.051 0.002 0.001 0.003-0.009 0.096 -0.001 0.000 0.009
-0.073 -0.053 0.004 0.005 0.003
0.055 0.198 0.011 0.003 0.039
-0.004 0.040 0.000 0.000 0.002
Total 0.031 0.032 0.105Beta = 0.031/0.032 Risk = sqrt(0.105/11)
= 0.98 = 9.78%
Interpretation:
Paramount Communications stock volatility (0.98) is approximately equalto the volatility of
market return. An investor will bearthe risk of 9.78% to get a return of 5% on this stock with
equal volatility. So,itis betterto investin this stock.
Return per unit risk = 5/9.78 = 0.51
So,to get 0.51% return, an investor has to bearthe risk of 1%.
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7. Vinati Organics
Months Vinati Organics Return Nifty Marketreturn
Aug 2009 40.37 4662.10
Sep 2009 40.50 0.00 5083.95 0.09Oct 2009 57.30 0.41 4711.70 -0.07
Nov 2009 58.60 0.02 5032.70 0.07
Dec 2009 66.85 0.14 5201.05 0.03
Jan 2010 77.50 0.16 4882.05 -0.06
Feb 2010 72.25 -0.07 5017.00 0.03
Mar 2010 71.80 -0.01 5249.10 0.05
Apr 2010 75.70 0.05 5278.00 0.01
May 2010 68.85 -0.09 4970.20 -0.06
Jun 2010 70.30 0.02 5312.50 0.07
July 2010 73.35 0.04 5367.60 0.01
Average Return 0.06 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.076 -0.060 -0.005 0.006 0.004
-0.088 0.352 -0.031 0.008 0.124
0.054 -0.041 -0.002 0.003 0.002
0.019 0.078 0.001 0.000 0.006
-0.076 0.096 -0.007 0.006 0.009
0.013 -0.131 -0.002 0.000 0.017
0.032 -0.069 -0.002 0.001 0.005-0.009 -0.009 0.000 0.000 0.000
-0.073 -0.154 0.011 0.005 0.024
0.055 -0.042 -0.002 0.003 0.002
-0.004 -0.020 0.000 0.000 0.000
Total -0.038 0.032 0.192
Beta = -0.038/0.032 Risk = sqrt(0.192/11)
= -1.20 = 13.21%
Interpretation:
As e can observe thatthe volatility in this stockis of negative nature i.e. (-1.20) it means that
ifthe market willincrease by 1%,the company stock will decline by 1.20%. an investor has
to bearthe risk of 13.21% to achieve the return of 6% which is not good in the case of so
much volatility.
Return per unit % risk = 6/13.21 = 0.45
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8. Force Motors
Months Force Motors Return Nifty Market return
Aug 2009 162.20 4662.10
Sep 2009 170.05 0.05 5083.95 0.09
Oct 2009 216.30 0.27 4711.70 -0.07Nov 2009 286.35 0.32 5032.70 0.07
Dec 2009 286.55 0.00 5201.05 0.03
Jan 2010 275.55 -0.04 4882.05 -0.06
Feb 2010 271.70 -0.01 5017.00 0.03
Mar 2010 349.45 0.29 5249.10 0.05
Apr 2010 372.65 0.07 5278.00 0.01
May 2010 360.35 -0.03 4970.20 -0.06
Jun 2010 393.55 0.09 5312.50 0.07
July 2010 421.90 0.07 5367.60 0.01
Average Return 0.10 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.076 -0.049 -0.004 0.006 0.002
-0.088 0.174 -0.015 0.008 0.030
0.054 0.226 0.012 0.003 0.051
0.019 -0.097 -0.002 0.000 0.009
-0.076 -0.136 0.010 0.006 0.019
0.013 -0.112 -0.001 0.000 0.013
0.032 0.188 0.006 0.001 0.035
-0.009 -0.031 0.000 0.000 0.001-0.073 -0.131 0.010 0.005 0.017
0.055 -0.006 0.000 0.003 0.000
-0.004 -0.026 0.000 0.000 0.001
Total 0.016 0.032 0.179Beta = 0.016/0.032 Risk = sqrt(0.179/11)
= 0.50 = 12.74%
Interpretation:
This seems to be an advantage for a rational investorto enterin the stock ofthis company.Because here an investor can get a return of 10% only by bearing only a risk of 12.74%; and
the volatility in the stock is 0.50 as compared to market return. If we calculate the per unit
risk return:
Return per unit risk = 10/12.74 = 0.78
This is too good for a rationalinvestor.
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9. Ansal House and Construction
Months Ansal house Return Nifty Market return
Aug 200959.20 4662.10
Sep 2009 60.95 0.03 5083.95 0.09
Oct 2009 47.95 -0.21 4711.70 -0.07
Nov 2009 50.65 0.06 5032.70 0.07
Dec 2009 63.20 0.25 5201.05 0.03
Jan 2010 57.25 -0.09 4882.05 -0.06
Feb 2010 55.85 -0.02 5017.00 0.03
Mar 2010 53.80 -0.04 5249.10 0.05
Apr 2010 69.95 0.30 5278.00 0.01
May 2010 59.60 -0.15 4970.20 -0.06
Jun 2010 60.15 0.01 5312.50 0.07
July 2010 64.75 0.08 5367.60 0.01
Average Return 0.02 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
0.076 0.011 0.001 0.006 0.000
-0.088 -0.232 0.020 0.008 0.054
0.054 0.038 0.002 0.003 0.001
0.019 0.229 0.004 0.000 0.053
-0.076 -0.113 0.009 0.006 0.013
0.013 -0.043 -0.001 0.000 0.0020.032 -0.055 -0.002 0.001 0.003
-0.009 0.282 -0.002 0.000 0.079
-0.073 -0.166 0.012 0.005 0.028
0.055 -0.009 -0.001 0.003 0.000
-0.004 0.058 0.000 0.000 0.003
Total 0.043 0.032 0.236Beta = 0.043/0.032 Risk = sqrt(0.236/11)
= 1.33 = 14.65%
Interpretation:
After analysing this stock,itis advisable thatthe new investor should notinvesttoo much in
this stock. Firstly the volatility is too high as compared to market return. Second is that the
investor has to bearthe risk of 14.65% to get a return of only 2%.
Return per unit risk = 2/14.65 = 0.14
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10.Panasonic Home & Appliance India Company
Months Panasonic Home Return Nifty Market return
Aug 2009 42.20 4662.10
Sep 2009 55.00 0.30 5083.95 0.09
Oct 2009 54.15 -0.02 4711.70 -0.07Nov 2009 52.75 -0.03 5032.70 0.07
Dec 2009 60.40 0.15 5201.05 0.03
Jan 2010 70.85 0.17 4882.05 -0.06
Feb 2010 80.05 0.13 5017.00 0.03
Mar2010 146.25 0.83 5249.10 0.05
Apr2010 174.90 0.20 5278.00 0.01
May 2010 137.15 -0.22 4970.20 -0.06
Jun 2010 183.95 0.34 5312.50 0.07
July 2010 195.65 0.06 5367.60 0.01
Average Return 0.17 0.01
(Rm-m) (Rs-s) (Rm-m)(Rs-s) (Rm-m)2 (Rs-s)
2
0.076 0.129 0.010 0.006 0.017
-0.088 -0.190 0.017 0.008 0.036
0.054 -0.201 -0.011 0.003 0.040
0.019 -0.030 -0.001 0.000 0.001
-0.076 -0.002 0.000 0.006 0.000
0.013 -0.045 -0.001 0.000 0.002
0.032 0.652 0.021 0.001 0.426
-0.009 0.021 0.000 0.000 0.001-0.073 -0.391 0.028 0.005 0.153
0.055 0.167 0.009 0.003 0.028
-0.004 -0.111 0.000 0.000 0.012
Total 0.073 0.032 0.72Beta = 0.073/0.032 Risk = sqrt(0.72/11)
= 2.29 = 25.48%
Interpretation:
As we see this companys data,the volatility rate is too high even unbelievable. It means the
stock willincrease/decrease by 2.29% with the 1% fluctuation in the market respectively. An
investor can get a high return of 17% but he/she has to bearthe risk of 25.48%.
Return per unit risk = 17/25.48 = 0.67
This return is quite good for an investor.
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Return per unit Risk ofSmallStocks:
Securities Return Risk Return Per unitRisk
Arrow Textile -1% 22.04% - 0.045Birla Power Sol -5% 13.63% - 0.367
GTN Industries 9% 21.98% +0.409
Zenith Birla 1% 19.29% +0.052
Paramount Comm. -2% 11.02% - 0.181
TranspekIndustries 5% 9.78% +0.511
Vinati Organics 6% 13.21% +0.454
Force Motors 10% 12.74% +0.785
Ansal House 2% 14.65% +0.137
Panasonic Home 17% 25.48% +0.667
Inference: The return per unit risk is calculated in the above table which shows that the
three stocks are giving negative return. Two securities Zenith Birla and Ansal House are
giving some positive return but not at all attractive. Only five stocks are giving good return
out of which Force Motors and Panasonic Home give very attractive return.
Froman investors point of View
Suppose an investor want to invest his/her money in the stock market. He/she chooses the
best four stocks out ofthe total no of stocks. Itis quite obvious thatthe rationalinvestor will
notinvestin the securities having negative return. So, atthe first glance,the investor chooses:
1. Force Motors
2. Panasonic Home
3. Transpek Industries
While investing the money, an investor will also look for the volatility of the stocks. To
choose fourth stock, he/she looks at the beta value ofGTN Industries (2.28) and Vinati
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Organics (-1.15). Because Market return is positive as we can see in the table, he/she will
choose that securities which will have a positive beta. So,
4. GTN Industries
As there are not hard & fast rules to give weight-age to different securities in case of more
than two securities; it all depends upon the psychology of a rational investor how he think,
whether he is optimist or pessimist, his/her family background and responsibility.
So, we calculate the weights in proportion to per unit risk return:
Securities Return (R)Risk (
)Per Unit Riskreturn
Weight-age (?)
Force Motors 10% 12.74% +0.785 0.33
Panasonic House 17% 25.48% +0.667 0.28
Transpek Industries 5% 9.78% +0.511 0.22
GTN Industries 9% 21.98% +0.409 0.17
Total +2.372 1.00
Portfolio Return = R1W1 + R2W2 + R3W3 + R4= 10*0.33 + 17*0.28 + 5*0.22 + 9*0.17
= 10.69 %
Portfolio Risk = 1W1 + 2W2 + 3W3 + 4W4
= 12.74*0.33 + 25.48*0.28 + 9.78*0.22 + 21.98*0.17
= 17.23%
Inference: After calculating the portfolio risk and return, now the investor can take
decision whether he/she should invest in individual security or in portfolio in differentsecurities. If an investor wants to investin only one security, he/she willinvest all money in
Force Motors.Otherwise, he/she willinvestin portfolio of securities and can get a return of
10.69% by bearing a risk of 17.23%.
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Comparison between Smalland Large Stocks
Research Objective: The objective of this study is to prove that the small cap stocks are
more risky than the large cap stocks. Because the day to day fluctuation going on in the small
stocks are too high,thats why we wantto study whetheritleads to more risk or not.
Research Hypothesis
Null Hypothesis (Ho): The risk factoris equalin both the cases, whetheritis small stock or
large stock.
Alternative Hypothesis (Ha): The small stocks are more risky than the large stocks.
Research MethodologyFor this research, we have taken a sample size of 8 companies, including 4 small stock
companies and 4 large stock companies, which are listed in NationalStock Exchange. The
sampling which have used is Random Sampling. For this, we have collected return of
previous 12 months and data source used is www.moneycontrol.com .
SmallStock Companies:
1. Force Motors
2. Panasonic Home
3. Transpek Industries
4. GTN Industries
Large Stock Companies:
1. Castrol
2. Religare
3. Nestle India
4. Bajaj Holding
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Research & Findings
As we have already calculated the return, risk and per unit risk return of small stock
companies as shown in the table:
Small stock securities Return (R) Risk () Per UnitRiskreturn
Weight-age
Force Motors 10% 12.74% +0.785 0.33
Panasonic House 17% 25.48% +0.667 0.28
Transpek Industries 5% 9.78% +0.511 0.22
GTN Industries 9% 21.98% +0.409 0.17
1.00
Calculated Portfolio Return = 10.69%
And Portfolio Risk = 17.23%
Return per Unit Risk = 10.69/17.23 = 0.62 ................(1)
Now we will compare this data with large stock return and risk.
Large StockSecurities Risk (R) Return () Per unit risk return Weight-age
Castrol 4.82% 6% +1.24 0.443
Religare Enter 5.66% 0.07% +0.01 0.004
Nestle India 2.97% 3% +1.01 0.361
Bajaj Holding 8.02% 4.30% +0.54 0.192
1.000
Portfolio Return = R1W1 + R2W2 + R3W3 + R4
= 6*0.443 + 0.07*0.004 + 3*0.361 + 4.3 = 6.51%
Portfolio Risk = 1W1 + 2W2 + 3W3 + 4W4
= 4.82*0.443 + 5.66*0.004 + 2.97*0.361 + 8.02*0.19 = 4.78%
Return per Unit Risk = 6.51/4.78 = 1.36 .................(2)
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From (1) & (2),
Itis clearthatthe return per unit riskis more in case oflarge stock securities as compares to
small stock securities. But after calculating the portfolio return and risk, it comes out that
whether the return is more in small securities, but the increment in risk is too much as
compare to increase in return in case of small securities.
So, by t i st t mentwe can say t at t ere is notenough evidence to accept
the nullhypothesis. In otherwords,
The risk factor is more in case of small securities as compared to large
securities.
Conclusion
The efficiency of small stocks in current scenario is increasing day by day. When we talk
about risk and return, today the investoris more optimistic or we can say, he/she is always
ready to bear the risk if expected return is also high. It is quite obvious that a new investor
doesnt wantto bearthe riskin initial years. But for an existing investor,itis quite different.
He is aware of market fluctuations, downs and upwards,the day to day decision criteria.
Now a Day, smaller companies are so thoroughly beating big companies in the stock market.
Many buyers of small-cap stocks might be just chasing performance. In other words,theyre piling onto small caps because they expecttheir momentum to continue.Investors are
willing to take risks, hoping for big returns from troubled companies. In the concept of
Evolution, the small, fast, agile and adaptable have the strongest possibility to survive and
grow. So it can be said thatthe there is huge riskinvolved in small stocks butto get a high
return because of high volatility,investors are willing to investin these kinds of stock.
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References
www.indianstocksnews.com
www.10paisa.com
www.investopedia.com
www.hotfrog.in/Products/Small-Cap-Stocks
www.estockwise.com/estockwise-articles/cap-stocks.htm
www.corporateinformation.com
www.moneycontrol.com
www.indianstocknews.com
www.bseindia.com
www.nseindia.com
www.businessweek.com
Companies from Newspaper (Business Standard)
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