research proposal idp final
TRANSCRIPT
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Research Proposal
On
Validity of Capital Asset Pricing Model & Stability of Systematic
Risk (Beta). An Empirical Study on Indian Stock Market
PAYAL B. BHATT
127700592008
YESHA B. MANKAD
127700592067
MBA Sem III
SUBMITTED TO
JAYSUKHLAL VADHAR INSTITUTE OFMANAGEMENT STUDIES
JAMNAGAR
AFFILITED TO:
GUJARAT TECHNOLOGICAL UNIVERSITY
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Introduction
To
FMCG (Fast Moving Consumer Goods)
The term FMCG (fast moving consumer goods), although popular and frequently
used does not have a standard definition and is generally used in India to refer to
products of everyday use. Conceptually, however, the term refers to relatively fast
moving items that are used directly by the consumer. Thus, a significant gap exists
between the general use and the conceptual meaning of the term FMCG.
Further, difficulties crop up when attempts to devise a definition for FMCG. The
problem arises because the concept has a retail orientation and distinguishes
between consumer products on the basis of how quickly they move at the retailers
shelves. The moot question therefore, is what industry turnaround threshold should
be for the item to qualify as an FMCG.
Products which have a quick turnover, and relatively low cost are known as Fast
Moving Consumer Goods (FMCG). FMCG products are those that get replaced
within a year. Examples of FMCG generally include a wide range of frequently
purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning
products, shaving products and detergents, as well as other non-durables such as
glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also
include pharmaceuticals, consumer electronics, packaged food products, soft
drinks, tissue paper, and chocolate bars.
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The FMCG Industry
The Indian FMCG sector is the fourth largest sector in the economy with a total
market size in excess of US$ 13.1 billion. It has a strong MNC presence and is
characterized by a well-established distribution network, intense competition
between the organized and unorganized segments and low operational cost.
Availability of key raw materials, cheaper labor costs and presence across the
entire value chain gives India a competitive advantage.
The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4
billion in 2015. Penetration level as well as per capita consumption in most product
categories like jams, toothpaste, skin care, hair wash etc in India is low indicating
the untapped market potential. Burgeoning Indian population, particularly the
middle class and the rural segments, presents an opportunity to makers of branded
products to convert consumers to branded products.
Industry Classification
The FMCG industry is volume driven and is characterized by low
margins. The products are branded and backed by marketing, heavy advertising,
slick packagingand strong distribution networks. The FMCG segment can be
classified under the premium segment and popular segment. The premium segment
caters mostly to thehigher/upper middle class which is not as price sensitiveapart from being brandconscious. The price sensit ive popular or
mas s se gme nt con si st s of co nsu mer s belonging mainly to the semi-
urban or rural areas who are not particularly brandconscious.
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FMCG Industry Economy
FMCG industry provides a wide range of consumables and accordingly the
amount of money circulated against FMCG products is also very high. The
competition among FMCG manufacturers is also growing and as a result of this,
investment in FMCG industry is also increasing, specifically in India, where
FMCG industry is regarded as the fourth largest sector with total market size of
US$13.1 billion. FMCG Sector in India is estimated to grow 60% by 2010. FMCG
industry is regarded as the largest sector in New Zealand which accounts for 5% of
Gross Domestic Product (GDP).
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History of FMCG
Fast moving consumer goods (FMCG), also known as consumer packaged goods
(CPG) are the products that have a quick turnover and relatively low cost.
Consumers generally put less thought into the purchase of FMCG than they do for
any other products.
The Indian FMCG industry witnessed significant changes through through 1990's.
Many players had been facing severe problems on account of increased
competition from small and regional players and from slow growth across its
various product categories. As a result, most of the companies were forced to
revamp their product, marketing, distribution and customer service strategies to
strengthen their position in the market.
By the turn of 20th century, the face of Indian FMCG industry had changed
significantly. With the liberalization and growth of economy, the Indian customer
witnessed an increasing exposure to new domestic and foreign products throughdifferent media, such as television and the Internet. Apart from this, social changes
such as an increase in the number of nuclear families and the growing number of
working couples resulting in increased spending power also contributed to the
increase in the Indian consumer's Personal consumption. The realization of the
customer's growing awareness and the need to meet changing requirements and
preferences on account of changing lifestyles required the FMCG producing
companies to formulate customer-centric strategies. These changes have a positive
impact, leading to the rapid growth in the FMCG industry. Increased availability of
retail space, rapid urbanization and qualified manpower also boosted the growth of
the organized retailing sector.
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HUL led the way in revolutionizing the product, market, distribution and service
formats of the FMCG industry by focusing on rural markets, direct distribution,
creating new product, distribution and service formats. The FMCG sector also
received a boost by the government led initiatives in the 2003 budget such as
setting up of excise free zones in various parts of the country that witnessed firms
moving away from outsourcing to manufacturing by investing in the zones.
Though the absolute profit made on FMCG products is relatively small, they
generally sell in large numbers and so the cumulative profit on such products can
be large. Unlike some industries, such as automobiles, computers and airlines
FMCG doesn't suffer from mass layoffs ever time the economy starts to dip. A
person may put off buying a car but he Willnot put off having his dinner.
Unlike other economy sectors, FMCG share float in a steady manner irrespective
of global market dip, because they generally satisfy rather fundamental, as opposed
to luxurious needs. The FMCG sector which is growing at a rate of 9% is the
fourth largest sector in the Indian economy and is a worth of Rs. 93000 crores. The
main contributor, making up 32% of the sector, is the south Indian region. It is
predicted that in the year 2010, the FMCG sector will be worth Rs.143000 crores.
The sector being one of the biggest sectors of the Indian economy provides upto 4
million jobs.
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The FMCG sector consists of the following categories:
Personal care- Oral care, Hair care, Wash (soaps), Cosmetics and Toiletries,
Deodorants and perfumes, Paper products (Tissues, Diapers, Sanitary products)
and Shoe care; the major players being Hindustan Uni-liver Limited, Godrej Soaps,
Colgate, Marico, Dabur and Procter & Gamble.
Household Care - Fabric wash (laundry soaps and detergents), Household
cleaners (Dish/utensil/floor/toilet cleaners), Air fresheners, Inseticides and
Mosquito repallants, Metal polish and Furniture polish; the major players being
HinduatnUni-liver Limited, Nirma and Ricket Colman.
Branded and Packaged Foods and Beverages -Health beverages, Soft drinks,
Staples/Cereals, Bakery products (Biscuits, Breads, cakes), Snack foods,
Chocolates, Ice-creams, Tea, Coffee, Processed fruits, Processed vegetables,
Processed Meat, Branded flour, Bottled water, Branded rice, Branded sugar,
Juices; the major players being Hindustan Uni-liver Limited, Nestle, Coca-Cola,
Cadbury, Pepsi and Dabur.
Spirits and Tobacco -The major players being ITC, Godfrey, Philips and UB.
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INTRODUCTION
TO
CAPM (CAPITAL ASSET PRICING MODEL)
The Capital Asset Pricing Model (CAPM) is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an
already well-diversified portfolio, given that asset's non-diversifiable risk. The
model takes into account the asset's sensitivity to non-diversifiable risk (alsoknown assystematic risk ormarket risk), often represented by the quantitybeta ()
in the financial industry, as well as the expected return of the market and the
expected return of a theoretical risk-free asset. CAPM suggests that an investors
cost of equity capital is determined bybeta.An extension to the CAPM is thedual-
beta model, which differentiatesdownside beta fromupside beta.[2]
The CAPM was introduced byJack Treynor (1961, 1962),William Sharpe (1964),
John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the
earlier work of Harry Markowitz ondiversification and modern portfolio theory.
Sharpe, Markowitz and Merton Millerjointly received theNobel Memorial Prize
in Economics for this contribution to the field offinancial economics.
Because of its simplicity and despite more modern approaches to asset pricing and
portfolio selection (like Arbitrage pricing theory and Merton's portfolio problem,
respectively), CAPM still remains popular.
http://en.wikipedia.org/wiki/Rate_of_returnhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Diversification_%28finance%29http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Systematic_riskhttp://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Beta_%28finance%29http://en.wikipedia.org/wiki/Expected_returnhttp://en.wikipedia.org/wiki/Risk-free_interest_ratehttp://en.wikipedia.org/wiki/Betahttp://en.wikipedia.org/wiki/Dual-betahttp://en.wikipedia.org/wiki/Dual-betahttp://en.wikipedia.org/wiki/Downside_betahttp://en.wikipedia.org/wiki/Upside_betahttp://en.wikipedia.org/wiki/Capital_asset_pricing_model#cite_note-Misleading_Betas:_An_Educational_Example-2http://en.wikipedia.org/wiki/Capital_asset_pricing_model#cite_note-Misleading_Betas:_An_Educational_Example-2http://en.wikipedia.org/wiki/Capital_asset_pricing_model#cite_note-Misleading_Betas:_An_Educational_Example-2http://en.wikipedia.org/wiki/Jack_L._Treynorhttp://en.wikipedia.org/wiki/William_Forsyth_Sharpehttp://en.wikipedia.org/wiki/John_Lintnerhttp://en.wikipedia.org/wiki/Jan_Mossinhttp://en.wikipedia.org/wiki/Harry_Markowitzhttp://en.wikipedia.org/wiki/Diversification_%28finance%29http://en.wikipedia.org/wiki/Modern_portfolio_theoryhttp://en.wikipedia.org/wiki/Merton_Millerhttp://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Scienceshttp://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Scienceshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Arbitrage_pricing_theoryhttp://en.wikipedia.org/wiki/Merton%27s_portfolio_problemhttp://en.wikipedia.org/wiki/Merton%27s_portfolio_problemhttp://en.wikipedia.org/wiki/Arbitrage_pricing_theoryhttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Scienceshttp://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Scienceshttp://en.wikipedia.org/wiki/Merton_Millerhttp://en.wikipedia.org/wiki/Modern_portfolio_theoryhttp://en.wikipedia.org/wiki/Diversification_%28finance%29http://en.wikipedia.org/wiki/Harry_Markowitzhttp://en.wikipedia.org/wiki/Jan_Mossinhttp://en.wikipedia.org/wiki/John_Lintnerhttp://en.wikipedia.org/wiki/William_Forsyth_Sharpehttp://en.wikipedia.org/wiki/Jack_L._Treynorhttp://en.wikipedia.org/wiki/Capital_asset_pricing_model#cite_note-Misleading_Betas:_An_Educational_Example-2http://en.wikipedia.org/wiki/Upside_betahttp://en.wikipedia.org/wiki/Downside_betahttp://en.wikipedia.org/wiki/Dual-betahttp://en.wikipedia.org/wiki/Dual-betahttp://en.wikipedia.org/wiki/Betahttp://en.wikipedia.org/wiki/Risk-free_interest_ratehttp://en.wikipedia.org/wiki/Expected_returnhttp://en.wikipedia.org/wiki/Beta_%28finance%29http://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Systematic_riskhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Diversification_%28finance%29http://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Rate_of_return -
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Formula:
where:
is the expected return on the capital asset is the risk-free rate of interest such as interest arising from government
bonds
is the sensitivity of the expected excess asset returns to the expected
excess market returns, or also ,
is the expected return of the market is sometimes known as the market premium (the difference
between the expected market rate of return and the risk-free rate of return).
is also known as the risk premium
Restated, in terms of risk premium, we find that:
Security Market Line:
The SML essentially graphs the results from the capital asset pricing model
(CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents
the expected return. The market risk premium is determined from the slope of the
SML.
http://en.wikipedia.org/wiki/Sensitivity_and_specificityhttp://en.wikipedia.org/wiki/Security_market_linehttp://en.wikipedia.org/wiki/Security_market_linehttp://en.wikipedia.org/wiki/Sensitivity_and_specificity -
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The relationship between and required return is plotted on the securities market
line(SML), which shows expected return as a function of . The intercept is the
nominal risk-free rate available for the market, while the slope is the market
premium, E(Rm)Rf.
The securities market line can be regarded as representing a single-factor model of
the asset price, where Beta is exposure to changes in value of the Market. The
equation of the SML is thus:
It is a useful tool in determining if an asset being considered for a portfolio offers a
reasonable expected return for risk. Individual securities are plotted on the SML
graph. If the security's expected return versus risk is plotted above the SML, it is
undervalued since the investor can expect a greater return for the inherent risk.
And a security plotted below the SML is overvalued since the investor would be
accepting less return for the amount of risk assumed.
Asset Pricing:
Once the expected/required rate of return is calculated using CAPM, we can
compare this required rate of return to the asset's estimated rate of return over a
specific investment horizon to determine whether it would be an appropriate
investment. To make this comparison, you need an independent estimate of the
return outlook for the security based on either fundamental or technical analysis
techniques, including P/E, M/B etc.
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Assuming that the CAPM is correct, an asset is correctly priced when its estimated
price is the same as the present value of future cash flows of the asset, discounted
at the rate suggested by CAPM. If the estimated price is higher than the CAPM
valuation, then the asset is undervalued (and overvalued when the estimated price
is below the CAPM valuation). When the asset does not lie on the SML, this could
also suggest mis-pricing. Since the expected return of the asset at time is
, a higher expected return than what CAPM suggests
indicates that is too low (the asset is currently undervalued), assuming that at
time the asset returns to the CAPM suggested price.
The asset price using CAPM, sometimes called thecertainty equivalent pricing
formula,is a linear relationship given by
Where,
Is the payoff of the asset or portfolio.
http://en.wikipedia.org/w/index.php?title=Certainty_equivalent_pricing_formula&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Certainty_equivalent_pricing_formula&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Certainty_equivalent_pricing_formula&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Certainty_equivalent_pricing_formula&action=edit&redlink=1 -
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ISSUES / PROBLEMS OF THE SECTOR
Increasing rate of inflation, which is likely to lead to higher cost of rawmaterials.
The standardization of packaging norms that is likely to be implemented bythe Government by Jan 2013 is expected to increase cost of beverages,
cereals, edible oil, detergent, flour, salt, aerated drinks and mineral water.
Steadily rising fuel costs, leading to increased distribution costs. The present slow-down in the economy may lower demand of FMCG
products, particularly in the premium sector, leading to reduced volumes.
The declining value of rupee against other currencies may reduce margins ofmany companies, as Marico, Godrej Consumer Products, Colgate, Dabur,
etc who import raw materials.
RESEARCH PROBLEM
The model assumes that the variance of returns is an adequate measurementof risk. This would be implied by the assumption that returns are normally
distributed, or indeed are distributed in any two-parameter way, but for
general return distributions other risk measures (likecoherent risk measures)
will reflect the active and potential shareholders' preferences more
adequately.
The model assumes that all active and potential shareholders have access tothe same information and agree about the risk and expected return of all
assets (homogeneous expectations assumption).
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The model assumes that the probability beliefs of active and potentialshareholders match the true distribution of returns. A different possibility is
that active and potential shareholders' expectations are biased, causing
market prices to be informationally inefficient. This possibility is studied in
the field of behavioral finance, which uses psychological assumptions to
provide alternatives to the CAPM such as the overconfidence-based asset
pricing model of Kent Daniel, David Hirshleifer, and Avanidhar
Subrahmanyam.
http://en.wikipedia.org/wiki/Behavioral_financehttp://en.wikipedia.org/wiki/David_Hirshleiferhttp://en.wikipedia.org/wiki/David_Hirshleiferhttp://en.wikipedia.org/wiki/Behavioral_finance -
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REVIEW OF LETERATURE
1) The capital asset pricing model (CAPM) is the standard risk-return modelused by most academicians and practitioners. The underlying concept ofCAPM is that investors are rewarded for only that portion of risk which is not
diversifiable. This non-diversifiable risk is termed as beta, to which expected
returns are linked. The objective of the study is to test the validity of this
theory in Indian capital market & the stability of this non diversifiable risk
(i.e. systematic risk or beta). The study has used the data of 10 stocks & 10
sectoral indices listed on the BSE, for a period of 4 years (January 2005 to
December 2008) for the analysis. The studies provide evidence against the
CAPM hypothesis. And finally, the studies also provide the evidence against
the stability of systematic risk.
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2)H. Jamal Zubairi, ShaziaFarooq Department of Finance andAccounting College of Business Management, Karachi :
The Capital Asset Pricing Model (CAPM) and Arbitrage PortfolioTheory
(APT) have been commonly used techniques in the global investing community
for calculating the required return of a risky asset. This paper investigates
whether CAPM and APT are valid models for determining price/return of the
fertilizer and the oil & gas sector companies listed on the Karachi Stock
Exchange (KSE). The purpose of the research is also to identify plausible
reasons for deviations from the theories. The conclusions arrived at through
data analysis reveal weak correlation between realized excess returns (i.e.
actual returns over and above the risk free rate) and the expected return based
on CAPM. With respect to APT model, the study reflects that macroeconomic
factors including changes in GDP, inflation, exchange rate and market return do
not serve as valid determinants of returns on oil, gas and fertilizer stocks.
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3)KapilChaoudhary , SakshiChaoudhary (2010):The present study examines the Capital Asset Pricing Model (CAPM) for the
Indian stock market using monthly stock returns from 278 companies of BSE 500
Index listed on the Bombay stock exchange for the period of January 1996 to
December 2009. The findings of this study are not substantiating the theorys basic
result that higher risk (beta) is associated with higher levels of return. The model
does explain, however, excess returns and thus lends support to the linear
structure of the CAPM equation. The theorys prediction for the intercept is that it
should equal zero and the slope should equal the excess returns on the marketportfolio. The results of the study lead to negate the above hypotheses and offer
evidence against the CAPM. The tests conducted to examine the nonlinearity of
the relationship between return and betas bolster the hypothesis that the expected
return-beta relationship is linear. Additionally, this study investigates whether the
CAPM adequately captures all-important determinants of returns including the
residual variance of stocks. The results exhibit that residual risk has no effect on
the expected returns of portfolios.
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4)Abu Hassan Md Isa and Chin-Hong Puah and Ying-Kiu Yong(2008):
This paper examines the applicability of CAPM in explaining the risk-return
relation in the Malaysian stock market for the period of January 1995 to December
2006. The test, using linear regression method, was carried out on four models: the
standard CAPM model with constant beta .The standard CAPM model with time-
varying beta .The CAPM model conditional on segregating positive and negative
market risk premiums with constant beta .As well as the CAPM model conditional
on segregating positive and negative market risk premiums with time varying beta
. Empirical results indicate that both the standard CAPM models are statistically
insignificant. However, the CAPM models conditional on segregating positive and
negative market risk premiums (Model III and Model IV) are statistically
significant. In addition, this study also discovers that time varying beta provides
better explanatory power.
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5)Chandra ShekharBhatnagar,RiadRamlogan :The Sharpe (1964), Lintner (1965) and Black (1972) Capital Asset Pricing Model
(CAPM) is considered one of the foundational contributions to the practice of
finance. The model postulates that the equilibrium rates of return on all risky assets
are a linear function of their covariance with the market portfolio. Recent work by
Fama and French (1996, 2006) introduce a Three Factor Model that questions the
real world application of the CAPM Theorem and its ability to explain stock
returns as well as value premium effects in the United States market. This thesis
provides an out-of-sample perspective to the work of Fama and French (1996,2006). Multiple regression is used to compare the performance of the CAPM, a
split sample CAPM and the Three Factor Model in explaining observed stock
returns and value premium effects in the United Kingdom market. The
methodology of Fama and French (2006) was used as the framework for this study.
The findings show that the Three Factor Model holds for the United Kingdom
Market and is superior to the CAPM and the split sample CAPM in explaining
both stock returns and value premium effects. The real world application of the
CAPM is therefore not supported by the United Kingdom data.
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6)Chien-Chung Nieh and Hsueh-Chu Yao (2013) :In this study, we used the PSTR (panel smooth transition regression) model to
investigate the nonlinear relationship between beta (systematic risk) and returns
(world market excess returns) for net oil export and net oil import groups. We set
the volatility of world market excess return as the threshold variable and the
percentage changes of crude oil price and exchange rate as the control variables.
Our results support the use of a nonlinear model to elucidate the behavior both
groups. We found that all beta values are positive and higher in the low regime
(i.e., volatility of world market excess return is low) and lower in the high regime(i.e., volatility of world market excess return is high). For the net oil export group,
the crude oil price change percentage is positive in the high regime, but the
exchange rate percentage change is positive in the low regime. For the net oil
import group, in both the low and high regimes, changes in crude oil price and
exchange rate have equally positive effects on the individual market excess return.
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7)Mika VaihekoskiEeroPtri (2007) :This study investigates the relationship between different sorts of risk and return
on six Finnish value-weighted portfolios from the year 1987 to 2004. Furthermore,
we investigate if there is a large equity premium in Finnish markets. Our models
are the CAPM, APT and CCAPM. For the CCAPM we concentrate on the
parameters of the coefficient of the relative risk-aversion and the marginal rate of
intertemporal substitution of consumption, whereas for the CAPM we estimate the
market beta and for the APT we will select some macroeconomic factors a priori.
The main contribution of this study is the use of General Method of Moments(GMM). We implement it to all of our models. We conclude that the CAPM is still
a robust model, but we find also support for the APT. In contradiction to majority
of studies, we are able to get theoretically sound values for the CCAPMs
parameters. The risk-aversion parameters stay below two and the marginal rate of
intertemporal substitution of consumption is close to one. The market beta is still
the most dominant risk factor, but the CAPM and APT are as good in
terms of explanatory power.
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8) Chandra ShekharBhatnagar, RiadRamlogan :
The Sharpe (1964), Lintner (1965) and Black (1972) Capital Asset Pricing Model
(CAPM) is considered one of the foundational contributions to the practice of
finance. The model postulates that the equilibrium rates of return on all risky assets
are a linear function of their covariance with the market portfolio. Recent work by
Fama and French (1996, 2006) introduce a Three Factor Model that questions the
real world application of the CAPM Theorem and its ability to explain stock
returns as well as value premium effects in the United States market. This thesis
provides an out-of-sample perspective to the work of Fama and French (1996,
2006). Multiple regression is used to compare the performance of the CAPM, a
split sample CAPM and the Three Factor Model in explaining observed stock
returns and value premium effects in the United Kingdom market. The
methodology of Fama and French (2006) was used as the framework for this study.
The findings show that the Three Factor Model holds for the United Kingdom
Market and is superior to the CAPM and the split sample CAPM in explaining
both stock returns and value premium effects. The real world application of the
CAPM is therefore not supported by the United Kingdom data.
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9)Kushankur Dey & Debasish Maitra, Doctoral Participant :Investment theory in securities market pre-empts the study of the relationship
between risk and returns. A review of studies conducted for various markets in the
world that researchers have used a number of methodologies to test the validity of
CAPM. While some studies have supported and agreed with the validity of CAPM,
some others have reported that beta alone is not a suitable predictor of asset pricing
and that a number of other factors could explain the cross-section of returns. The
paper reiterates the importance of a multifactor model in the explanation ofinvestors required rate of return of the portfolio in the Indian capital market. The
results show that intercept is significantly different from zero and the combination
ofsizei, ln(ME/BE)i, (P/EiP/Em) do not explain the variation in security returns
under both percentage and log return series while (di-Rf) shows very dismal result.
The combination ofi, ln(ME/BE)i, (P/Ei P/Em), sizei, and (di-Rf) do not explain
the variation in security returns when log return series is used and the combination
of i, ln(ME/BE)i, sizeialso do not explain any variation in security returns when
percentage return series is used. However, beta alone, when considered
individually in two parameter regressions and also multi-factor model, does not
explain the variation in security/portfolio returns. This casts doubt on the validity
of extended and standard CAPM. The empirical findings of this paper would be
useful to financial analysts in the Indian capital market. From the researchers
prerogative multifactor analysis would be more indicative one to include some
macroeconomic factors, firm-specific factors and market factors to enlarge the
understanding of modern finance and to unfold the dilemma of using CAPM model
in asset-pricing.
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10)MazenDiwani, HosseinAsgharian (2010) :This paper is designed to examine the validity of the CAPM model in the emerging
markets. Itook the Indian market to be the case in which we examine the
applicability of this model andtherefore I decided to perform the study on one of
the biggest Indian markets; Bombay StockExchange. The SENSEX30 was chosen
as the examined index and I performed the study on the28 listed companies in the
market (BSE30 or SENSEX30). I used weekly stocks returns for the period
Nov04 to OCT09. To eliminate the measurement bias which will be incurred
during the study, a window of 53 weeks was taken to regress the weekly returns ofthe listed stocks on the weekly returns of the SENSEX30 index at the same period,
this will result in 53 betas for each stock in the first period, and then we started to
move the window week by week. When testing the CAPM model for the whole
five-year period hasnt showed any strong evidence that support the validity of this
model and in order to get better estimates, we divided the whole sample into 5
subsamples of one year each. We have examined three tests for each year of the
whole 5 year sample and the results have shown some better estimates for some of
the years but still did not support the CAPM hypothesis When running the non-
linearity test, it was proven that the model explains the excess returns which-in
return-supports the linear structure of the CAPM equation.
This paper is solely based on the fact that in order for the model to be valid and
strong academically, the alpha (the intercept) should equal to zero and the beta (the
slope) should equalthe excess returns on the market portfolio. This was a pure
prediction of the CAPM, therefore wetested the above hypotheses but the results
failed to prove or provide any evidence that coincide with the null hypotheses!
The second part of this investigation was to examine the ability of the CAPM
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model to provide a non-linearity relationship between the return and betas.
Conducting the test has shown that the expected return-beta relationship is linear.
In fact, this paper has gone too far by also including a brief investigation over
whats called the non-systematic test. The idea behind this was to investigate
whether the CAPM can include allthe components of the stocks returns including
the residual variance of the stocks. Our results based on the test for the non-
systematic risk-show that the residual risk has no effect on the expected returns of
the listed stocks!
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OBJECTIVES OF THE STUDY
To identify the accuracy of beta on the basis of company return Validity of CAPM model for selected FMCG Company. To use the CAPM to establish benchmarks for measuring the performance of
investment portfolios.
To infer from the CAPM the correct risk-adjusted discount rate to use indiscounted-cash flow
Valuation models.
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STATEMENT OF HYPOTHESIS
Ho:
H1:
SAMPLE DESIGN
TYPES OF RESEARCH Descriptive Research
DAT A COLLECTION METHOD Secondary data
STASTICAL TOOLSAppropriate statistical tools will be
applied
SAMPLE UNITS FMCG Industry (10 Companies)
LIMITATIONS OF THE STUDY
Limited sample size
Time constraint is limited Study is mainly dependent on assumptions.