Risk–Return Analysis of Selected Equity Stocks Listed in Bombay Stock Exchange Using Capital Asset Pricing Model

V. Bheemeswara Reddy () and N. Harish
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V. Bheemeswara Reddy: Dept. of MBA, The Oxford College of Engineering, Associate Professor
N. Harish: Dept. of MBA, The Oxford College of Engineering, Associate Professor

A chapter in Proceedings of the 3rd International Conference on Reinventing Business Practices, Start-ups and Sustainability (ICRBSS 2023), 2024, pp 375-388 from Springer

Abstract: Abstract Investment in Stocks is considered the best alternative to earn higher returns in form of dividends and capital appreciation. Two important ways to investment in Stocks viz., Risk and Return. Indeed, each return on investment is influenced by varying levels of risk. Investors consider Stocks which offer higher returns at comparatively low risk levels. These stocks may be underpriced in the market whereas stocks with less returns at higher risk level may be overpriced and such stocks are eschewed by the investors. A wise investment decision requires proper measurement of both returns and risk. Risks are of two types viz., systematic and unsystematic risks. Unsystematic risk can be eliminated by efficient diversification of investment where systematic also called as market risk cannot be removed through diversification. So, the investment decision should be based on comparison of returns with systematic risk. CAPM helps the investors in identifying stocks best suited for their investment by measuring actual returns, expected returns and Systematic risk. This study makes an endeavour to employ the Capital Asset Pricing Model (CAPM) on a portfolio of 30 stocks listed on the Bombay Stock Exchange, with the aim of identifying stocks that might be undervalued or overvalued. When stocks offer returns additional than expected, they are underpriced otherwise they are overpriced or fairly priced. Underpriced stocks are seemly for long period investment as they offer high returns in the long period. The study found that 15 out of 30 Stocks are considered underpriced and potentially suitable for long-term investment viz., Axis Bank Ltd., Bajaj Auto Ltd., Bajaj Finance Ltd., Hindustan Unilever Ltd., Housing Development Finance Corporation Ltd., Infosys Ltd., Kotak Mahindra Bank Ltd., Reliance Industries Ltd., Tata Consultancy Services., Tata Steel Ltd., Vedanta Ltd., Yes Bank Ltd., HDFC Bank Ltd., IndusInd Bank Ltd., Maruti Suzuki India Ltd.

Keywords: Bombay Stock Exchange; CAPM; Equity Stocks; Systematic risk; Unsystematic risk; overpriced; underpriced (search for similar items in EconPapers)
Date: 2024
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DOI: 10.2991/978-94-6463-374-0_33

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