Risk and Return Analysis of Stock Market

The Indian stock market has gained a new life in the post-liberalization era. It has experienced a structural change with the setting up of SEBI, opening up to the foreign investors, the establishment of the NSE, initiation of the screen based trading method, dematerialization of securities and presentation of derivative instruments. The activities of the market have increased in all respects. Market capitalization has increased spectacularly. The number of listed companies has gone up. But the most important and amazing phenomena of all are the movement of secondary market share prices which are reflected in either the upward or downward trend in the major share price indices in the country. The stock market reflects the performance of an economy. When the economy does well and the companies make a lucrative profit, people get induced to invest in stocks because they expect a higher return from their stockholding. Risk and return analysis play a key role in the most individual decision-making process.rnIt can be concluded from the study that the investors can choose SBI and ICICI to invest their funds because their cost of capital and risk is less and they are performing too good. This could be understood from the Jenson‘s Alpha that these two companies earned more than 7% excess return than the expected return. Long term investors were able to take benefit of the market as it is less volatile. As there is less fluctuation in the shares when compared to the market as well as its prices, the long term investors able to predict when the share will rise. rnCost of Equity: The price of equity is the return that stockholders require for their investment in a company. The price of equity can be a bit complex to calculate as share capital carries no "explicit" cost. Unlike debt, which the company must pay in the form of predetermined interest, equity does not have a definite price that the company must pay, but that doesn't mean no cost of equity exists. Common stockholders expect to obtain a certain return on their equity investment in a company. The risk-return study can be used as a stable platform by the investors in establishing the tradeoff between portfolio risk and return. The equity holders' required rate of return is a price from the company's view because if the company does not deliver this expected return, shareholders will simply sell their shares, causing the price to drop. The cost of equity is basically what it costs the company to maintain a share price that's theoretically satisfactory to investors. On this basis, the most commonly accepted method for calculating the cost of equity comes from the Nobel Prize-winning capital asset pricing model (CAPM): The cost of equity is expressed below: Cost of Equity = Risk-Free Rate + Beta x Risk Premium.