RISK ANALYSIS OF SENSEX STOCKS (BETA ANALYSIS APPROACH)

Presented By: Shubham Aggarwal

What is stock exchange?

A stock exchange can be defined as a centralized market for buying and selling of stocks, where the price is determined through supply-demand mechanism.

Stock exchange is a place where stocks, bonds and debentures are traded.

Stock Exchanges are noted as “an essential part of the Capitalistic System of economy”.

History of stock exchange in India

Indian Stock Market is the Oldest stock market in Asia. Dates back to the close of 18th century when the East India

Company used to transact loan securities. An informal group of 22 stockbrokers began trading under a

banyan tree opposite the Town Hall of Bombay from the mid-1850s.

In 1928, the plot of land on which the BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg) was acquired, and a building was constructed and occupied in 1930.

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act.

Leading Stock Exchanges of India

National Stock Exchange (NSE) National Stock Exchange incorporated in the year 1992 provides

trading in the equity as well as debt market. Maximum volumes take place on NSE and hence enjoy leadership position in the country today.

Bombay Stock Exchange (BSE) Established in 1875, Bombay Stock Exchange is Asia's first

& fastest Stock Exchange with the speed of 200 micro seconds and one of India's leading exchange groups. More than 5500 companies are listed on BSE making it world's No. 1 exchange in terms of listed members.

Two Main Indices Of BSE And NSE

Sensex Sensex is an abbreviation of the Bombay Exchange Sensitive

Index. (Sensex) is the benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded stocks on the BSE.

Nifty Nifty is an Index of NSE (National Stock Exchange).It 

consists of 50 top companies representing 21 major sectors listed on NSE, basis for selection of companies is market capitalisation only.

Data Methodology

The method that is used to collect data is of secondary nature. It means the data for the dissertation has been collected

through secondary sources like internet. Here most of the data is collected from the site of Bombay

Stock Exchange (BSE) about the different companies and on the basis of that data different tools has been applied for the analysis purpose.

Research Methodology

Initially the data of all the companies listed in SENSEX was collected from the BSE website for dates 1/01/2013 – 31/12/2015.

Then the whole data has been segregated on the closing price of weekly basis, i.e. closing price of each Friday, same was done for the value of SENSEX index value.

Return of both (value of stock and Index) has been taken out so that the beta of every security can be calculated, here

Y= % return of the value of security X= % return of the value of Index. Beta is a measure of the volatility of a security or a portfolio in

comparison to the market as a whole. The formula for calculating beta is-

Continued

N= total number of data ∑= Sum of % return of variable Then total Risk of every stock is calculated to calculate the risk

associated with the stock, it is calculated as:-

Now systematic risk will be calculated to know the market risk of the securities. Systematic risk, also known as "market risk" or "un-diversifiable risk” it is calculated as:-

SR= ((X-∑X*X-∑X) *(β*β))  X= Current value of Index ∑X= Sum of value of Index β = Beta

Continued

At the end the unsystematic risk is calculated to see up to what extend the risks can be diversified. Unsystematic risk, also known as "specific risk," "diversifiable risk“, it is calculated as:-

USR= TR- SR TR= Total Risk SR= systematic Risk

Findings

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Beta

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Findings Continued

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Total Risk

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Continued

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Systematic Risk

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Continued

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Unsystematic Risk

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Results

β in all the stocks is positive which indicates that there is a positive relation between return of sensex and return of stocks.

Value of β in case of Adani Port is 1.41 which indicates that 1% change in Sensex will bring 1.41% change in Stock Return

Value of β in case of Asian Paint is 1.27 which indicates that 1% change in Sensex will bring 1.27% change in Stock Return

Value of β in case of Axis bank is 1.84 which indicates that 1% change in Sensex will bring 1.84% change in Stock Return. This share is highly risky as β >1.5, but with high risk comes the high return.

Value of β in case of Bajaj Auto is .86 which indicates that 1% change in Sensex will bring .86% change in Stock Return, which means the security moves in the same direction as the market

Continued

Value of β in case of Bharti Airtel is .92 which indicates that 1% change in Sensex will bring .92% change in Stock Return, which means the stock moves in the same direction as the market

Value of β in case of BHEL is 1.81 which indicates that 1% change in Sensex will bring 1.81% change in Stock Return This share is highly risky as β >1.5, but with high risk comes the high return.

Value of β in case of CIPLA is .67 which indicates that 1% change in Sensex will bring .67% change in Stock Return, which means the stock moves in the same direction as the market

Value of β in case of Cola India is .91 which indicates that 1% change in Sensex will bring .91% change in Stock Return, which means the stock moves in the same direction as the market

Recommendations

It’s not advised to invest only in shares that have higher risk because in order to make large and huge profits one may also loose huge amount at certain point.

An individual is advised to create a portfolio of both higher risk and lower risk shares so that their portfolio provides them good return edge at all times i.e. in bullish and bearish conditions.

Conclusion

The only “sure thing” in investing, is that market risk can never be eliminated no matter how much you diversify. Risk is a four letter word that every knowledgeable investor should be familiar with.

In fact, portfolio returns are really meaningless if there is no regard to portfolio risk, as measured by standard deviation.

The risk, however, of a well diversified portfolio depends entirely on the risk of the individual securities included in that portfolio, as measured by beta.

Thank You