Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
PERFORMANCE EVALUATION OF SELECTED STOCKS USING CAPM
1Nagesh
MR, Asst. Professor, Pooja Bhagavat Memorial Mahajana PG Centre, Mysore.
2Srinivas
KR, Asst. Professor, Pooja Bhagavat Memorial Mahajana PG Centre, Mysore.
ABSTRACT
The development of capital Asset pricing Model, popularly known as CAPM has been
successful one in the context of measurement of risk and return of an investment decision when
used cautiously. CAPM provide a logical and quantitative approach for estimation of risk. It
provides the decision makers with useful estimates of the required rate of return on risky
securities. It answers to the investor’s queries as where to invest how to invest and what discount
rate to use for project cash flows. This study is an attempt to evaluate the performances of stocks
& measure the systematic risk of the security by using beta as a measure of risk by using CAPM
model. The study finds out the stocks which are overvalued & undervalued.CAPM, mean &
standard deviation were used for analyzing the data for selected samples.
Keywords: CAPM,return, risk, systematic risk.
INTRODUCTION
Investor wants to maximize expected return subject to tolerance of their risk. The risk
associated with the holding in the return that is achieved will be less than the return that was
expected. Thus, here lies importance of analyzing securities within a risk return context.
Investors invest their funds on the assets with anticipation of future returns. In the real business
world, we could find great investment opportunities.
The development of capital Asset pricing Model, popularly known as CAPM has been
successful one in the context of measurement of risk and return of an investment decision when
used judiciously and cautiously. CAPM provide a logical and quantitative approach for
estimation of risk. It provides the decision makers with useful estimates of the required rate of
return on risky securities on capital budgeting project. It answers to the investor’s queries as
where to invest how to invest and what discount rate to use for project cash flowers.
The CAPM was developed to explain how risky securities are priced in market and thus,
the risk and return and their measures using Capital Asset Pricing Model (CAPM) will be the
core of the study undertaken. The attachment of the paramount importance of these two principal
properties, return and risk inherent in securities with the analysis of any investment decision
makes the study significant.
Return is the growth of wealth due to investment for a period of time. Risk is the
variability of the actual return from the expected return of an investment. Investors, whether they
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Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
are individual or institutions, try to diversify the risk of the investment. Hence, they invest in
different securities. The collection of different securities that investors hold is termed as
portfolio.
The risk and return and there measures using Capital Asset Pricing Model (CAPM) will
be the core of the study undertaken. The CAPM was developed in the mid 1960’s uses various
assumptions about markets and investor behavior to give a set of equilibrium conditions that
allow us to predict the return of an asset for its level of systematic risk. The CAPM uses a
measure of systematic risk that can be compared with other assets in the market. Using this
measure of risk can theoretically allow investors to improve their portfolios and managers to find
their required rate of return.
STATEMENT OF THE PROBLEM
Earning maximum returns on investments is definitely the motto of any investor. But
investor wants to maximize expected return subjected to their assessment and capacity to take
risk. Thus investor need to make as well as diversified portfolio and also prepare risk and return
associated with these securities.
Thus the return and risk and their measurement using CAPM will be the core of the study
undertaken. The attachment of important properties return and risk inherent in securities with the
analysis of any investment decision makes the study significance. And also one should test the
validity of the model for the practical application.
OBJECTIVES




To evaluate of performances of stocks using CAPM model.
To measure the systematic risk of the security by using beta as a measure of risk.
To calculate expected rate of return expected by investors on security for any level of
risk.
To find whether securities are over reaction or under reaction in the market.
SCOPE
The research was confined to study the performance of selected securities in
comparison with the market index. Three sectors and two companies under each sectorwere
chosen, these companies were listed in the Bombay stock exchange.
RESEARCH METHODOLOGY
Sampling Design
The sample size taken for conducting research is six companies from three sectors
The sample is screened to include only those scripts which have been quoted at least in 36
months during the entire 3 years period of the study. The selected companies are:
SECTORS
BANKING
PHARMACETICAL
FMCG
COMPANIES
ICICI BANK,IDBI
CIPLA,RANBAXY
HUL,ITC
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Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
Sources and methods of data collection
Every data regarding the study has been obtained through secondary source. Such as
annual reports of the companies, stock market websites.
Securities data regarding daily share prices of three years have collected from websites of
concern stock market.
The quantitative technique has been adopted for the analysis of data. Statistical tools such
as geometric mean, regression analysis & SPSS software has used to compute the data analysis.
LIMITATION OF THE STUDY
 As we considered beta only, the bonus shares issued not considered.
 The CAPM holds theoretically but is hard to test empirically since stocks indexes and
other measures of the market are poor proxies for the CAPM variables.
DATA ANALYSIS AND INTERPRETATION
CALCULATION OF MARKET RETURN&MARKET VARIANCE OF BSE
2008
Opening
Price
20325.3
Closing
Price)
9647.31
2009
9720.55
2010
Returns
̅)
(X - 𝐗
̅)2
(X - 𝐗
-0.5254
-0.61436
0.3774
17464.8
0.79669
0.70758
0.50066
17473.5
20509.1
0.17373
0.08468
0.00717
2011
20621.6
15454.9
-0.2505
-0.3395
0.11526
2012
15534.7
1942.71
0.25054
0.161489
0.02656
Year
AVERAGE RETURN 0.08901
1.02656
Variance = (X - ̅
X) 2/n
Variance = 1.02656/5
Therefore, Variance = 0.20
CALCULATION OF RETURN& COVARIANCE OF CIPLA LTD
YEAR
RETURNS
X(Market)
Y(Cipla)
̅)
(X - 𝐗
̅)
(Y - 𝐘
2008
2009
2010
2011
2012
Avg
Return
(CIPLA)
-0.1307
0.8338
0.0911
-0.1363
0.293
-0.5253
0.7966
0.1737
-0.2505
0.2505
-0.1307
0.8338
0.0911
-0.1363
0.293
-0.6144
0.70758
0.08468
-0.3395
0.16146
-0.3209
0.6435
-0.0991
-0.3265
0.10273
̅)
(X - 𝐗
̅)
(Y - 𝐘
0.1971
0.4553
-0.0083
0.1108
0.0165
0.19027
0.089011
0.07003
SUM
0.7714
COV
0.15
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Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
CALCULATION OF BETA OF CIPLA LTD
β= COV (Rp, Rm)
σm2
COV (RpRm) = 0.15
σm2
= 0.20
β
= 0.75
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
β =0.75
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+0.75(8.9-6.7)
Rj=8.35
CALCULATION OF RETURN& COVARIANCE OFRANBAXY LTD
YEAR
Returns
X(Market) Y(Ranbaxy)
̅)
(X - 𝐗
̅)
(Y - 𝐘
̅) (Y - 𝐘
̅)
(X - 𝐗
2008
2009
2010
2011
2012
Avg
Return
(Ranbaxy)
-0.41302
1.0452
0.149
-0.3267
0.2383
-0.5253
0.7966
0.1737
-0.2505
0.2505
-0.41302
1.0452
0.149
-0.3267
0.2383
-0.6144
0.70758
0.08468
-0.3395
0.16146
-0.5515
0.9067
0.0105
-0.4652
0.0998
0.3774
0.6415
0.0008
0.1579
0.0161
0.1385
0.089011
0.1385
SUM
1.1937
COVARIANC
E
0.24
CALCULATION OF BETA OF RANBAXY LTD
β= COV (Rp, Rm)
σm2
COV (RpRm) = 0.24
σm2
= 0.20
β
= 1.2
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
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Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
β =1.2
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+1.2(8.9-6.7)
Rj=9.34
CALCULATION OF RETURN& COVARIANCE OFHUL LTD
YEAR
2008
2009
2010
2011
2012
Avg Return (HUL)
̅)
RETURNS X(Market) Y(HUL) (X - 𝐗
̅)
(Y - 𝐘
0.1683
-0.5253
0.1683
-0.61436
-0.0281 0.01726
0.0539
0.7966
0.0539
0.70758
-0.1425 -0.1008
0.1742
0.1737
0.1742
0.08468
-0.0222 -0.00187
0.2993
-0.2505
0.2993
-0.3395
0.1029
0.286
0.2505
0.286
0.1614589 0.0896
0.1964
0.089011
0.1964
CALCULATION OF BETA OF HUL LTD
β= COV (Rp, Rm)
σm2
COV (RpRm) = -0.02
σm2
= 0.20
β
= 0.1
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
β =-0.1
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+0.1(8.9-6.7)
Rj=6.92
153
̅) (Y - 𝐘
̅)
(X - 𝐗
-0.0349
0.0144
SUM
-0.1059
COV
0.02
Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
CALCULATION OF RETURN& COVARIANCE OFITC LTD
YEAR
RETURNS
X(Market)
Y(ITC)
̅)
(X - 𝐗
̅)
(Y - 𝐘
̅) (Y (X - 𝐗
̅
𝐘)
2008
-0.1912
-0.5253
-0.1912
-0.61436
-0.2944
0.1808
2009
0.4542
0.7966
0.4542
0.70758
0.351
0.2483
2010
-0.3047
0.1737
-0.3047
0.08468
-0.4079
0.0345
2011
0.145
-0.2505
0.145
-0.3395
0.0418
0.0141
2012
O.4128
0.2505
O.4128
0.1614589
0.3096
0.0499
Avg Return(ITC)
0.1032
0.089011
0.1032
SUM
0.5276
COVARIA
NCE
0.1
CALCULATION OF BETA OF ITC LTD
β= COV (Rp, Rm)
σm2
COV (RpRm)
σm2
= 0.20
β
= 0.5
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
β =0.5
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+0.5(8.9-6.7)
Rj=7.8
= 0.10
CALCULATION OF RETURN& COVARIANCE OFIDBI LTD
YEAR
RETURNS
X(Market)
Y(IDBI)
̅)
(X - 𝐗
̅)
(Y - 𝐘
̅) (Y (X - 𝐗
̅)
𝐘
2008
-0.5936
-0.5253
-0.5936
-0.61436
-0.6855
0.4211
2009
0.8742
0.7966
0.8742
0.70758
0.7823
0.5535
2010
0.2871
0.1737
0.2871
0.08468
0.1952
0.0165
2011
-0.5306
-0.2505
-0.5306
-0.3395
-0.6225
0.2113
2012
0.4227
0.2505
0.4227
0.1614589
0.3308
0.0534
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Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
Avg
Return
(IDBI)
0.0919
0.089011
0.0919
SUM
1.2558
C0VARIANCE
0.25
CALCULATION OF BETA OF IDBI LTD
β= COV (Rp, Rm)
σm2
COV (RpRm) = 0.25
σm2
= 0.20
β
= 1.25
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
β =1.25
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+1.25(8.9-6.7)
Rj=9.45
CALCULATION OF RETURN& COVARIANCE OFICICI LTD
RETURN X(Market
̅)
YEAR
Y(ICICI) (X - 𝐗
S
)
̅)
(Y - 𝐘
̅)
(X - 𝐗
̅)
(Y - 𝐘
2008
-0.6369
-0.5253
-0.6369
-0.61436
-0.8006
0.4918
2009
0.9246
0.7966
0.9246
0.70758
0.7609
0.5383
2010
0.289
0.1737
0.289
0.08468
0.1253
0.0106
2011
-0.4062
-0.2505
-0.4062
-0.3395
-0.5699
0.1934
2012
Avg
Return(ICICI
)
0.6482
0.2505
0.6482
0.1614589
0.4845
0.0782
0.1637
0.089011
0.1637
SUM
1.3123
COVARIANC
E
0.26
CALCULATION OF BETA OF ICICI LTD
β= COV (Rp, Rm)
σm2
COV (RpRm)
= 0.26
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Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
σm2
β
= 0.20
= 1.3
CALCULATION OF EXPECTED RETURN
Rf=6.7
E(Rm)=0.089011
β =1.3
Rj= Rf+β*[E(Rm)-Rf]
= 6.7+1.3(8.9-6.7)
Rj=9.36
FINDING
STOCKS
OF
UNDERVALUATION
AND
OVERVALUATION
OF
REMARKS
COMPANY
CIPLA
RANBAXY
IDBI
RETURNS
IN %
19.027
13.85
9.19
BETA
0.75
1.2
1.25
RF
6.7
6.7
6.7
RM IN %
8.90
8.90
8.90
8.90
EXPECTED
RETURN
8.35
9.35
9.45
UNDER
VALUE
OVER
VALUE
UNDER
VALUE
ICICI
16.37
1.3
6.7
HUL
19.64
0.1
6.7
8.90
6.48
UNDER
VALUE
ITC
10.32
0.5
6.7
8.90
7.8
UNDER
VALUE
156
9.56
UNDER
VALUE
Asia Pacific Journal of Research
Vol: I Issue XI, November 2013
ISSN: 2320-5504, E-ISSN-2347-4793
CONCLUSION
It has been concluded from the analysis made on the basis of CAPM and evaluating
selected securitiesof the six companies inthree sectors that five of the companies’ i.e. Cipla,
Ranbaxy, Icici, Hul, Itc, are found to be undervalued. One of the company i.eIdbi, found to be
overvalued.
As the author have calculated beta values, beta which is less than market beta i.e., Cipla,
Hul, Itc, is found to be defensive and Ranbaxy, Icici, Idbiin which the beta is more than the
market beta is found to be aggressive.
Alpha of Cipla, Ranbaxy, Icici, Hul, Itc, is positive and Idbi bank shows negative alpha.
On the basis of the study, analysis of securities by using CAPM, it is concluded that five
companies has shown positive result out of six companies. Therefore, it is concluded that the
investors can buy such five companies stocks andmake the profit. The companies which shown
positive performances arecipla, Ranbaxy, hul, itc, and icici. But the company idbi shown
negative performance, therefore it is concluded that the investors shouldsell idbistocks.
BIBLIOGRAPHY
Text books:
Investments - William Sharpe
Investments - Bodie, Kane, Marcus
Investments analysis and
Portfolio manageme -Prasanna Chandra
Websites:
www.bseindia.com
www.wekipidia(company info)
www.G-gste.com(articales)
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