So far, the thrust area of research in investment management was actually regarding how investment can be made positive? What are the factors to be considered? Which are the beneficial assets for the investment? How maximum profits can be earned? Etc… were the questions. No one clearly ever discuss about the real risk involved in the asset investment market. The investor should firstly know or critically analyze how risk is related to the assets and how this risk deeply influence the assets , what are the risks should bear by the investor during the time of investment and so on .Now in order to satisfy these requirements a new area of research in the field of investment risk is being emerged .The area of research like CAPM is the best example which shows the relationship between risk and return involved in the capital asset investment. CAPM can be defined as “a model that provides a frame work to determine the required rate of return on an asset and indicates the relationship between return and risk of the assets.”
In order to have a thorough idea of CAPM we should study of its assumptions also, why because every concept or theory should be approved if it has very precise and clear cut assumptions. The assumptions of CAPM includes:-
Ø Market efficiency: The capital market efficiency implies that share prices reflect all available information. Also, individual investors are not able to affect the price of securities. This means that there are large numbers of investors holding small amount of wealth
Ø Risk aversion and mean-variance optimization: Investors are risk –averse. They evaluate a security’s return and risk in terms of the expected return and variance or standard variance respectively. They prefer the highest expected returns for a given level of risk. This implies that investors are mean variance optimizers and they form efficient portfolios.
Ø Homogeneous expectations: All investors have the same expectations about the expected returns and risks of securities.
Ø Single time period: All investor’s decisions are based on a single time period.
Ø Risk – free rate: All investors can lend and borrow at a risk free rate of interest. They form portfolios from publicly traded securities like shares and bonds.
Testing of CAPM
According to the assumptions of CAPM the practicability will be in hinge, why because assumptions never constitute a theory’s practicability. The practicability should be clearly tested with the data availability in the market and the result should lead to the correctness of the theorem. Under CAPM ‘Beta is taken as the risk factor in the investments and how this beta is related to expected return’, we have to prove this hypothesis. There has being using a lot of methods to test the hypothesis such as empirical testing, scientific testing etc…According to the different studies the result is different. As per some studies it is considered as there is no relationship between beta and expected return, where as some other tests say that there should have a very good and strong relationship among these factors. But according to CAPM there exist a relationship between beta and rate of return but not in a very strong way .
TESTING OF CAPM OF “BAJAJ HOLDINGS & INVESTMENT COMPANY”
In order to get the better understanding I select the “Bajaj holdings and Investment Company” for a case study regarding CAPM. For doing the CAPM test I collect three months data i.e. from 1/April/2010 to the date of 31/June/2010. Collect closing prices of this company and whole market, treasury bill market etc... For doing the test. Now there is a prescribed formula for calculating CAPM of any company. That is :-
RI = RF + (Rm - RF) B
Where RI = return of one company
RF = free risk security
Rm = market return
B = beta value
BAJAJ HOLDINGS AND INVESTMENT COMPANY (01/04/2009--30/06/2009) | |||||||||
DATE | CLOSING PRICE | RI | CLOSING NIFTY | RM | RF | RM-RF | BETA | CAPM | |
01-Apr-09 | 297.05 | 3060.35 | |||||||
02-Apr-09 | 298.1 | 0.0035348 | 3211.05 | 0.0492427 | 0.1817 | -0.13246 | 0.393205 | 0.12961714 | |
06-Apr-09 | 300.75 | 0.0088896 | 3256.6 | 0.0141854 | 0.1817 | -0.16751 | 0.393205 | 0.11583242 | |
08-Apr-09 | 310.3 | 0.0317539 | 3342.95 | 0.0265154 | 0.1817 | -0.15518 | 0.393205 | 0.12068063 | |
09-Apr-09 | 315.9 | 0.0180471 | 3342.05 | -0.000269 | 0.1817 | -0.18197 | 0.393205 | 0.11014879 | |
13-Apr-09 | 318.8 | 0.0091801 | 3382.6 | 0.0121333 | 0.1817 | -0.16957 | 0.393205 | 0.11502551 | |
15-Apr-09 | 318.7 | -0.000314 | 3484.15 | 0.0300213 | 0.1817 | -0.15168 | 0.393205 | 0.12205917 | |
16-Apr-09 | 311 | -0.024161 | 3369.5 | -0.032906 | 0.1817 | -0.21461 | 0.393205 | 0.09731578 | |
17-Apr-09 | 315.05 | 0.0130225 | 3384.4 | 0.004422 | 0.1817 | -0.17728 | 0.393205 | 0.11199341 | |
20-Apr-09 | 329.65 | 0.0463419 | 3377.1 | -0.002157 | 0.1817 | -0.18386 | 0.393205 | 0.10940653 | |
21-Apr-09 | 350.6 | 0.0635523 | 3365.3 | -0.003494 | 0.1817 | -0.18519 | 0.393205 | 0.10888075 | |
22-Apr-09 | 416.3 | 0.187393 | 3330.3 | -0.0104 | 0.1817 | -0.1921 | 0.393205 | 0.10616522 | |
23-Apr-09 | 374.55 | -0.100288 | 3423.7 | 0.0280455 | 0.1817 | -0.15365 | 0.393205 | 0.12128229 | |
24-Apr-09 | 365.85 | -0.023228 | 3480.75 | 0.0166633 | 0.1817 | -0.16504 | 0.393205 | 0.11680673 | |
27-Apr-09 | 366.5 | 0.0017767 | 3470 | -0.003088 | 0.1817 | -0.18479 | 0.393205 | 0.10904027 | |
28-Apr-09 | 345.9 | -0.056207 | 3362.35 | -0.031023 | 0.1817 | -0.21272 | 0.393205 | 0.09805623 | |
29-Apr-09 | 339.5 | -0.018502 | 3473.95 | 0.0331911 | 0.1817 | -0.14851 | 0.393205 | 0.12330555 | |
04-May-09 | 355.2 | 0.0462445 | 3654 | 0.0518286 | 0.1937613 | -0.14193 | 0.393205 | 0.13795265 | |
05-May-09 | 368.4 | 0.0371622 | 3661.9 | 0.002162 | 0.1937613 | -0.1916 | 0.393205 | 0.1184235 | |
06-May-09 | 367.6 | -0.002172 | 3625.05 | -0.010063 | 0.1937613 | -0.20382 | 0.393205 | 0.11361653 | |
07-May-09 | 365.6 | -0.005441 | 3683.9 | 0.0162343 | 0.1937613 | -0.17753 | 0.393205 | 0.12395677 | |
08-May-09 | 369.3 | 0.0101204 | 3620.7 | -0.017156 | 0.1937613 | -0.21092 | 0.393205 | 0.11082766 | |
11-May-09 | 363.9 | -0.014622 | 3554.6 | -0.018256 | 0.1937613 | -0.21202 | 0.393205 | 0.11039498 | |
12-May-09 | 356.25 | -0.021022 | 3681.1 | 0.0355877 | 0.1937613 | -0.15817 | 0.393205 | 0.13156664 | |
13-May-09 | 353 | -0.009123 | 3635.25 | -0.012456 | 0.1937613 | -0.20622 | 0.393205 | 0.11267581 | |
14-May-09 | 363.65 | 0.03017 | 3593.45 | -0.011499 | 0.1937613 | -0.20526 | 0.393205 | 0.11305211 | |
15-May-09 | 366.7 | 0.0083872 | 3671.65 | 0.0217618 | 0.1937613 | -0.172 | 0.393205 | 0.12613024 | |
18-May-09 | 398 | 0.0853559 | 4323.15 | 0.1774407 | 0.1937613 | -0.01632 | 0.393205 | 0.18734394 | |
19-May-09 | 383.3 | -0.036935 | 4318.45 | -0.001087 | 0.1937613 | -0.19485 | 0.393205 | 0.1171459 | |
20-May-09 | 394.8 | 0.0300026 | 4270.3 | -0.01115 | 0.1937613 | -0.20491 | 0.393205 | 0.11318921 | |
21-May-09 | 397 | 0.0055724 | 4210.9 | -0.01391 | 0.1937613 | -0.20767 | 0.393205 | 0.11210389 | |
22-May-09 | 399.85 | 0.0071788 | 4238.5 | 0.0065544 | 0.1937613 | -0.18721 | 0.393205 | 0.12015061 | |
25-May-09 | 388.1 | -0.029386 | 4237.55 | -0.000224 | 0.1937613 | -0.19399 | 0.393205 | 0.11748525 | |
26-May-09 | 373.95 | -0.03646 | 4116.7 | -0.028519 | 0.1937613 | -0.22228 | 0.393205 | 0.10635963 | |
27-May-09 | 372.9 | -0.002808 | 4276.05 | 0.0387082 | 0.1937613 | -0.15505 | 0.393205 | 0.13279364 | |
28-May-09 | 368.9 | -0.010727 | 4337.1 | 0.0142772 | 0.1937613 | -0.17948 | 0.393205 | 0.12318725 | |
29-May-09 | 364.45 | -0.012063 | 4448.95 | 0.0257891 | 0.1937613 | -0.16797 | 0.393205 | 0.12771379 | |
01-Jun-09 | 404.3 | 0.1093428 | 4529.9 | 0.0181953 | 0.2014633 | -0.18327 | 0.393205 | 0.12940143 | |
02-Jun-09 | 453.25 | 0.1210735 | 4525.25 | -0.001027 | 0.2014633 | -0.20249 | 0.393205 | 0.12184331 | |
03-Jun-09 | 440.25 | -0.028682 | 4530.7 | 0.0012044 | 0.2014633 | -0.20026 | 0.393205 | 0.1227205 | |
04-Jun-09 | 447.35 | 0.0161272 | 4572.65 | 0.0092591 | 0.2014633 | -0.1922 | 0.393205 | 0.12588765 | |
05-Jun-09 | 445.5 | -0.004135 | 4586.9 | 0.0031164 | 0.2014633 | -0.19835 | 0.393205 | 0.12347231 | |
08-Jun-09 | 431.95 | -0.030415 | 4429.9 | -0.034228 | 0.2014633 | -0.23569 | 0.393205 | 0.10878836 | |
09-Jun-09 | 452.2 | 0.0468804 | 4550.95 | 0.0273257 | 0.2014633 | -0.17414 | 0.393205 | 0.13299153 | |
10-Jun-09 | 460.8 | 0.0190181 | 4655.25 | 0.0229183 | 0.2014633 | -0.17855 | 0.393205 | 0.13125853 | |
11-Jun-09 | 470.65 | 0.0213759 | 4637.7 | -0.00377 | 0.2014633 | -0.20523 | 0.393205 | 0.12076459 | |
12-Jun-09 | 461.45 | -0.019547 | 4583.4 | -0.011708 | 0.2014633 | -0.21317 | 0.393205 | 0.11764315 | |
15-Jun-09 | 442.45 | -0.041175 | 4484 | -0.021687 | 0.2014633 | -0.22315 | 0.393205 | 0.11371952 | |
16-Jun-09 | 439.1 | -0.007571 | 4517.8 | 0.0075379 | 0.2014633 | -0.19393 | 0.393205 | 0.12521089 | |
17-Jun-09 | 411.95 | -0.061831 | 4356.15 | -0.035781 | 0.2014633 | -0.23724 | 0.393205 | 0.1081778 | |
18-Jun-09 | 388.95 | -0.055832 | 4251.4 | -0.024046 | 0.2014633 | -0.22551 | 0.393205 | 0.11279175 | |
19-Jun-09 | 390.15 | 0.0030852 | 4313.6 | 0.0146305 | 0.2014633 | -0.18683 | 0.393205 | 0.12799972 | |
22-Jun-09 | 371.95 | -0.046649 | 4235.25 | -0.018163 | 0.2014633 | -0.21963 | 0.393205 | 0.11510497 | |
23-Jun-09 | 359.75 | -0.0328 | 4247 | 0.0027743 | 0.2014633 | -0.19869 | 0.393205 | 0.12333783 | |
24-Jun-09 | 355.5 | -0.011814 | 4292.95 | 0.0108194 | 0.2014633 | -0.19064 | 0.393205 | 0.12650119 | |
25-Jun-09 | 362.2 | 0.0188467 | 4241.85 | -0.011903 | 0.2014633 | -0.21337 | 0.393205 | 0.11756653 | |
26-Jun-09 | 362.9 | 0.0019326 | 4375.5 | 0.0315075 | 0.2014633 | -0.16996 | 0.393205 | 0.13463584 | |
29-Jun-09 | 364.15 | 0.0034445 | 4390.95 | 0.003531 | 0.2014633 | -0.19793 | 0.393205 | 0.12363536 | |
30-Jun-09 | 366.3 | 0.0059042 | 4291.1 | -0.02274 | 0.2014633 | -0.2242 | 0.393205 | 0.11330548 | |
1) If Nifty unit moves forward Re.1 , then the Bajaj holdings and investment company’s share moves 0.3932054 unit 2) This indicates that the unit value of Bajaj is much lesser than the market value 3) If we compare the RI and CAPM columns in the first table it shows that real value of shares is less than the market value 4) For shareholders this is the best time to sell out their shares in Bajaj holdings company 5) The CAPM calculation is very much effective to take the above said decisions. 6) Testing of CAPM clearly shows the relation ship between how much return receiving that much risk is also their with the investment 7) Treasury bills are best examples for risk free investment. |
