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RISK RETURN ANALYSIS IN EQUITIES with reference to NSE Sensex companies
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INTRODUCTION

The risk/return relationship is a fundamental concept in not only financial analysis, but in every aspect of life. If decisions are to lead to benefit maximization, it is necessary that individuals/institutions consider the combined influence on expected (future) return or benefit as well as on risk/cost. The requirement that expected return/benefit be commensurate with risk/cost is known as the "risk/return trade-off" in finance.

This discusses the trade-off and, using conventional statistical tools, provides a method for quantifying risk. Two categories of risk borne by the firm's stockholders, business risk and financial risk, are discussed and demonstrated, as is the concept of leverage. The session also examines risk reduction via portfolio diversification and what requirements need to be met for firms to experience the benefits of diversification. The Capital Asset Pricing Model (CAPM) is used to demonstrate the risk/return trade-off by relating the required return on the firm's investments to its beta (or market) risk.

OBJECTIVES
1. To calculate the risk return of a industries to estimate weather the company is reliable for the investor to invest in the shares of the company.
2. To analyze the various risks and returns patterns in shares.
3. To know the risk involved with invests in equities.
4. To observe the degree of volatility in equities market.
5. To understand the price fluctuations & the factors influencing the fluctuations.

NEED, SCOPE & IMPORTANCE OF STUDY

Need of the study:
Investment decisions are influenced by various motives. Some people invest in a business to acquire control and enjoy the prestige associated with it. Some people invest in expensive yachts and famous villas to display their wealth. Most investors however are largely guided by the pecuniary motive of earning a return on their investment.

Return is the primary motivating force that drives investment. It represents the reward for undertaking investment. Since the game of investing is about returns (after allowing for risk), measurement of realized (historical) returns is necessary to access how well the investment manager has done. In addition, historical returns are often used as an important input in estimating future (prospective) returns.

Scope of the study:
The scope of the study is confined to only four sectors that are Information technology, telecom, automobile and pharmacy.

Importance of the study:
ROE is important to every organization: for-profit, not-for-profit, educational
Institutions, government agencies, and more. There are variations in how they define value, however, all organizations want value for the investments they make. What makes ROE important is it provides leaders with an important way of deciding in which programs to invest and which programs to delay or reject.

REASEARCH METHODOLOGY

RESEARCH DESIGN
This project is based on exploratory research with both qualitative analysis as well as quantitative analysis. The research methodology adopted is based on secondary data. The various sources of secondary data include
Internet
Share prices of different NSE Sensex companies.
Information provide by mahindra finance
Magazine

LIMITATIONS OF THE STUDY
The present project work has been undertaken to provide information regarding risk return on equities. The following are the limitations of the study.
Any rational investor, before investing his or her investible wealth in the stock, analysis the risk associated with the particular stock. The actual return he receives from a stock may vary from his expected return and the risk is expressed in terms of variability of return.
The study is based on the secondary data which is available from various.
The study is limited to only four sectors.
The time taken to undertaken the project work is very short; hence only four sectors were chosen for the study.

INDUSTRY PROFILE

INDUSTRY OVERVIEW
The securities market achieves one of the most important functions of channeling idle resources to productive resources or from less productive resources to more productive resources. Hence in the broader context the people who save and investors who invest focus more towards the economy s abilities to invest and save respectively. This enhances savings and investments in the economy, the two pillars for economic growth. The Indian Capital Market has come a long way in this process and with a strong regulator it has been able to usher an era of a modern capital market regime. The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety.

Stock Exchange:
A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as, other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock a market is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

History of stock exchanges:
In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.
However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of Influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London. Stock Exchange

The role of stock exchanges:
Stock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels.

Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock exchange is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth
Stocks exchanges do not exist to redistribute wealth although casual and professional stock investors through stock prices increases (that may result in capital gains for the
Investor) and dividends get a chance to share in the wealth of profitable businesses.

Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (pets.com (2000), Enron corporation (2001), One.tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), Mci world com (2002), or paramalat(2003), are among the most widely scrutinized by the media).

Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such municipal bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the Government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Major stock exchanges:
Twenty Largest Stock Exchanges by Market Capitalization as of July 12, 2007 (in trillions of US dollars)
NYSE Euro next
Tokyo Stock Exchange
NASDAQ
London Stock Exchange
Hong Kong Stock Exchange
Toronto Stock Exchange
Frankfurt Stock Exchange (Deutsche Brose)
Shanghai Stock Exchange
Madrid St ock Exchange (BME Spanish Exchanges)
Australian Securities Exchange
Swiss Exchange
Nordic Stock Exchange Group OMX (Copenhagen, Helsinki, Iceland,
Stockholm, Tallinn, Riga and Vilnius Stock Exchanges)
Milan Stock Exchange (Boras Italian)
Bombay Stock Exchange
Korea Exchange
Sao Paulo Stock Exchange Bovespa
National Stock Exchange of India

STOCK EXCHANGE & SHARES
The market or place, where securities, viz. shares are exchange / traded or simply where buying and selling takes place, is called stock exchange or stock market.
Presently, the stock market in India consists of twenty three regional stock exchanges and two national exchanges, namely, the National Stock Exchange (NSE) And Over the Counter Exchange of India (OTC).
The Bombay Stock Exchange (BSE) is the largest Stock Exchange, in the country, where maximum transactions, in terms of money and shares take place. The other major stock exchanges are Calcutta, Madras and Delhi Stock Exchanges. Other one at Ahmedabad, Jaipur, Bangalore, Kanpur, Rajkot, Hyderabad, Cochin, Pune, Bhubaneshwar, Guwahti, Indore, Mangalore, Ludhiana, Patna, Saurashtra, Vadodara, Coimbatore, Meerut, and Surat.

FUNCTIONING OF STOCK EXCHANGE:
LISTING:

Listing of shares, on a stock exchange, means, such shares can be bought and sold, in stock exchange.

A Company, which intends to issue shares, through prospectus, shall have to apply to one or more stock exchanges, for getting its shares listed.

The detailed and elaborate procedure of getting the shares listed on a stock exchange is monitored by SEBI. The SEBI, issues guidelines and notifications, from time to time, with regard to listing of securities.

Once the shares are listed, the are divided into two categories:
1. GROUP A SHARES
2. GROUP "B" SHARES

GROUP "A" SHARES: are referred to as Cleaned Securities or specified shares". The facility for carrying forward a transaction from one account period to another is available for these shares. Group "A" shares represent companies, with huge amount of capital, and equally a large scope for investment. These shares are frequently traded and command higher price earning multiples.

GROUP "B" SHARES: are referred to as, none cleaned securities or non-specified shares. For these groups facility of carrying forward is not available.
Whenever a share is moved from Group "B" to Group "An" its market price rises; likewise, when a share is shifted from Group "A" to Group "B", its market price declines. There are some criteria and guide lines, laid down by stock exchange, for shifting stocks from the non-specified list to the specified list.

PRIMARY MARKET
Since 1991/92, the primary market has grown fast as a result of the removal of investment restrictions in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised in the primary market. This figure rose to Rs276.21 billion in 1994/95. Since 1995/1996, however, smaller amounts have been raised due to the overall downtrend in the market and tighter entry barriers introduced by SEBI for investor protection .SEBI has taken several measures to improve the integrity of the secondary market. Legislative and regulatory changes have facilitated the corporatization of stockbrokers. Capital adequacy norms have been prescribed and are being enforced. A mark-to-market margin and intraday trading limit have also been imposed. Further, the stock exchanges have put in place circuit breakers, which are applied in times of excessive volatility. The disclosure of short sales and long purchases is now required at the end of the day to reduce price volatility and further enhance the integrity of the secondary market.
The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

FEATURES OF PRIMARY MARKET ARE:-

1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors.
3. The company receives the money and issue new security certificates to the investors
4. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital formation in the economy.
6. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public .
Methods of issuing securities in the Primary Market
1. Initial Public Offer;
2. Rights Issue (For existing Companies); and
3. Preferential Issue

Secondary market:
The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. [1] Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.

Function
In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (Originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly. This is how stock exchanges originated; see History of the Stock Exchange).
Secondary marketing is vital to an efficient and modern capital market. Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time. For example, a traditional loan allows the borrower to pay back the loan, with interest, over a certain period. For the length of that period of time, the bulk of the lender's investment is inaccessible to the lender, even in cases of emergencies. Likewise, in an emergency, a partner in a traditional partnership is only able to access his or her original investment if he or she finds another investor willing to buy out his or her interest in the partnership. With a securitized loan or equity interest (such as bonds) or tradable stocks, the investor can sell, relatively easily, his or her interest in the investment, particularly if the loan or ownership equity has been broken into relatively small parts. This selling and buying of small parts of a larger loan or ownership interest in a venture is called secondary market trading.
Under traditional lending and partnership arrangements, investors may be less likely to put their money into long-term investments, and more likely to charge a higher interest rate (or demand a greater share of the profits) if they do. With secondary markets, however, investors know that they can recoup some of their investment quickly, if their own circumstances change.

Private equity secondary market
In finance, the private equity secondary market (also often called private equity secondary or secondary) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however there is a robust and maturing secondary market available for sellers of private equity assets.
Driven by strong demand for private equity exposure, a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure

Laws governing capital market
The four main legislations governing the securities market are:
(a) The SEBI Act, 1992 which establishes SEBI to protect investors and develop and
Regulate the Markets.
(b) The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues.
© The Securities Contracts (Regulation) Act, 1956, read with the Securities Contracts (Regulation) Rules, 1957 which provide for regulation of transactions in securities through control over stock exchanges; and
(d) The Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities.

Regulators
SEBI is the primary regulator of the Securities Market and the entities operating therein. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by government and regulations by SEBI. All these are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed

Market Value
The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as "market price The market capitalization plus the market value of debt. Sometimes referred to as "total market value". In the context of securities, market value is often different from book value because the market takes into account future growth potential. Most investors who use fundamental analysis to pick stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to its book value, net assets or some other measure.

Stock
A type of security that signifies ownership in a corporation and represents a Claim on part of the corporation s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes. Bankrupt and is liquidated. Also known as "shares" or "equity".

A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have. Claim to 10% of the company s assets Stocks are the foundation of nearly every portfolio. Historically, they have outperformed most other investments over the long run.


Shareholder

Any person, company, or other institution that
3 own at least 1 share in a company. A shareholder may also be referred to as a stockholder.
Shareholders are the owners of a company. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.

Share
A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares.

In the past, shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Today, brokerages have electronic records that show ownership details. Owning a paperless share makes conducting trades a simpler and more streamlined process, which is a far cry from the days were stock certificates needed to be taken to a. Brokerage before a trade could be conducted. While shares are often used to refer to the stock of a corporation, shares can also represent ownership of other classes of financial assets, such as mutual funds.

BSE INDICES:-
INDEX:

An Index is used to summarize the price movements of a unique set of goods in the financial, commodity, forex or any other market place. Financial indices are created to measure price movements of stocks, bonds, T-bills and other type of financial securities. More specifically, a stock index is created to provide investors with the information regarding the average share price in the stock market. Broad indices are expected to capture the overall behavior of equity market and need to represent the return obtained by typical portfolios in the country

SENSEX:
SENSEX is India's first Index compiled in 1986. It is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.
The base year of BSE-SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media. Due to its wide acceptance amongst the investors, SENSEX is regarded to be the pulse of the Indian stock market. All leading business newspapers and the business channels report SENSEX, as it is the language that all investors understand.
As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards) to be used for various research purposes. The Index Cell of the exchange is responsible for the day-to-day maintenance of the index within the broad index policy set by the Index Committee. The Index Cell ensures that the SENSEX and all other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity.
SENSEX is calculated using a market capitalization weighted method. As per this methodology, the level of the index reflects the total market value of all 30- component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of the stock by the number of shares outstanding Statisticians call the index of a set of combined variables (such as price and No. of shares) a composite index. An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. It is much easier to graph a chart based on indexed values than one used on actual values.
World over majority of the well known indices are constructed using Market Capitalization Weighted Method .
In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 Companies in the index by a number called the Index Divisor. The Divisor is the only page link to the original based period value of the SENSEX. The Divisor keeps the Index comparable over a period of time and the reference point for the entire index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian Stock Markets.

COMPANY PROFILE

Mahindra and Mahindra financial service limited:

History:
Mahindra finance was incorporated on January 01, 1991 with Mahindra and Mahindra ltd, leading manufacturer of utility vehicles and tractors in the country and kotak Mahindra finance limited.

Vision statement:
To be the number one rural finance company and continue to retain leader ship position for Mahindra products.

Mahindra finance will provide products and services tailored to the needs of m&m, its most favored customers. In case of demand supply mismatch of funds, Mahindra finance will put all their resources to find a solution.

Mahindra finance may finance other products after catering to the needs of m&m. however; this would always constitute a small portion of Mahindra finance s total business.

Mahindra finance will help m&m develop better products by providing first hand information received from the target market.

Mahindra finance strengths:
The vision of Mahindra finance is validated by its strength, which are
Parentage of m&m ltd
RBI classification as hp company
Excellent reputation for prompt repayment
Wide rural network
Dealer shareholding and relationship of dealers with m&m ensure dealer commitment
Well connected to m&m/dealer net work. Wide knowledge of rural finance

Mahindra finance values:
Good corporate citizenship
Professionalism
Customer first
Quality focus
Dignity of the individual


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