Management Dynamics Management Dynamics

Investment in share market involves high level of risk. This risk is multiplied with the increase in volatility in stock prices. Therefore it is important for an investor to have proper knowledge of the risk and returns attached with various stocks so that a better risk-return trade off can be reached and a wise investment decision can be made. For quite a few years, Indian Stock Markets, driven by domestic as well as foreign institutional investors, have been growing at unprecedented rate and thus have given an opportunity for investors to earn superior returns. But, at the same time, the level of volatility has also been very high and this has increased the risk. Although an investor can construct diversified portfolio for reducing risk, this diversification may not help in dealing with the systematic risk attached with stocks selected in the portfolio. Therefore calculating only total risk of various stocks is not enough, rather one should also know how much of this risk is systematic risk and how much is unsystematic risk. This study aims at finding out the risk attached with the stocks of prominent companies of IT (Information Technology) and Banking Sector and beta factors of these companies. Authors have also found out the systematic and unsystematic risk attached with the shares of these companies.


INTRODUCTION
In simple words, the term investment can be defined as enployment of funds in certain assets with the aim of earning additional return or growth in value.For a long period of time equity market has been attracting the investors and with the passage of time it has gained increased importance because of its potential to generate superior returns.Although stocks generate returns at very high rate, investment in equities involves high level of risk as well.This risk further increases with the increase in price fluctuations in the stock market.Therefore, it is important for investors to have proper knowledge of risk & return levels associated with various stocks so that a better risk-return trade oflF can be created and a wise investment decision can be taken.
For quite a few years the Indian Stock Markets have been a hot seat for investors.Driven by domestic as well as foreign institutional investors, they have been growing at unprecedented rate.But the level of volatility has also been high.This means although the return potential for investors has increased, the risk associated with such investment has also gone up.This situation calls for an in-depth analysis before making an investment in equities so that the risk associated with this investment can be minimized.Calculation and analysis of only total risk (variance) is not enough, rather both the components of risk i.e. systematic risk and unsystematic risk should be analysed.

Risk
The term risk in investment means the possibility that realized returns will be less than expected returns.This risk is measured in terms of variability in returns.Generally, the standard deviation or variance of values of returns is used to denote the total risk of a security.Higher the variability in returns, more will be the risk.

Systematic or Non-diversijiable
Risk: It is that portion of total variability in returns which is caused by general factors e.g.economic, political, social and cultural factors aflFecting the prices of aU securities.Nature of this risk is same for all securities and that is why it cannot be reduced by constructing portfolios.That is why it is also known as non-diversifiable risk.

Unsystematic or Diversifiable Risk
It is that portion of risk that is caused by the factors which are peculiar to a firm or industry.Such factors affect the prices of the security of a firm or the securities belonging to an industry only i.e. this risk is unique to a firm or Scott and Edward (1990) analyzed the important risks of owning shares and how these risks can be minimized.According to them financial risks can be minimized by investors by sticking to shares of companies that employ small amounts of debt.
For reducing business risk investors should select shares of firms that are diversified in several unrelated industries and for ensuring some degree of liquidity investors should restrict investment in stocks having a history of adequate trading volume.Mandell (1992) revealed that the nature of market risk is global i.e. these risks affect the entire investment market.Market risk is the systemic risk that affects all securities simultaneously and it cannot be reduced through diversification.Stocks of all companies including the well-managed companies face market risk.He also mentioned that market risk is influenced by factors like economic conditions, political events, mass psychological factors, etc and these factors cannot be predicted accurately.
Carter Randal (1992) in his study emphasized that to be successful investors should never be pessimists.He insisted that patient investors have consistently made money in the equities market irrespective of the fact that there was major economic crisis almost every year.He emphasized that investing in the stock market should be an un-emotional endeavour and concluded that investors should own a stock only if they believe it would perform well.Jain (1992) gave specific tips for buying and selling of shares.He advised that investors should buy shares of fast growing sector of the economy and also should diversify their investment amongst number of growth companies operating in different sectors.For selling of shares he suggested that investor should sell the shares the moment company has or almost reached the peak of its growth.Yasaswy (1993) mentioned in his study that 'tvimaround stocks' have potential for big profits because of being underpriced but at the same time involves higher risk.So, investors should consider both the aspects and accordingly take the decision to invest in such stocks.Yasaswy J. N. (1993) evaluated the risks involved in different categories of stocks.Risk is lowest in defensive stocks followed by growth stocks where the risk is medium while the cyclical stocks involve higher risks.Accordingly the return also varies for these stocks.For the purpose of this study stocks of ten prominent companies of IT sector and ten prominent companies of banking sector listed at National Stock Exchange have been selected.The list of these companies is as follows: ITSector Bankme Sector

Data and Its Source
The

FINDINGS AND OBVERSATIONS
indicator of systematic risk i.e. it measures the non-diversifiable risk associated with a security.P shows how the price of a security responds to market forces.It indicates that a change in the stock market index brings what change in the price of the security.The more responsive is the price of a security to the changes in the market, the higher will be the value of beta.Beta is calculated by relating the returns on a security with the returns of the concerned market.Value of beta indicates the risk of a security.Higher is the value of beta, more is the risk.The beta for the market is 1.00 and the other betas are viewed in relation to this value.The value of beta can be positive of negative.The positive value of beta indicates direct relationship between the returns of market and returns of security while the negative value of beta reflects an inverse relationship between the two. is the square of coefficient of correlation (r) between the return on stock and return on index.It indicates that to what extent the variance of stock returns is explained by the variance of index returns.his study revealed that investors should notice the easily observable warnings of a firm's failure in order to avoid risk of losses due to bankruptcy of the firm.Preethi Singh (1986) in her study mentioned that risk is an integral part of any investment decision and investor should understand and measure the risk attached to the investment while taking such decision.According to her most investors are "risk averse" and thus will try to take minimum risk.The additional risk will only be taken with the expectation of higher return.
drastically increased towards the end of the last decade.He argued that the equity investments are not for the weak hearted, as the equity holders cannot escape the impact of the movements find out the risk associated (expressed in terms of variance) with the stocks of these companies.3.To find out the systematic risk and unsystematic risk attached associated the stock of these companies.4.To find out the corresponding coefficients of determination i.e. to what extent the variability of stock returns is explained by the variability of stock returns.Jaipuria Institute of Management Management Dynamics,Volume 14, Number 1 (2014) returns of each stock (a.^)has been calculated to measure the total risk associated with the stocks.Similarly, the variance of index (QJ^ ) has been calculated to measure the risk associated is nothing but square of coefficient of correlation (r).Therefore coefficient of determination for a stock has been calculated by squaring the coefficient of correlation between the weekly returns on that particular stock and the weekly returns on NIFTY.

CONCLUSION
The study reveals that stocks of IT companies have much less values of beta in comparison to the beta values of stocks of banks.Highest value of beta out of all the selected IT stocks is 0.98 which is less than the lowest value of beta (1.07) out of the selected banking stocks.Stocks of all the IT sector companies have very high proportion of unsystematic risk (more than 90% in the case of most of the stocks) in their total risk.It is also reflected in the extremely low value of their coeflBcients of determination.In other words we can say that majority of the fluctuations in the stocks of IT companies are not because of the fluctuations in market (index).On the other hand, the risk of banking shares is quite evenly distributed between systematic risk and unsystematic risk.It is also reflected in the values of their coeflBcients of determination which range from 0.4 to 0.6.Out of all the selected companies, the stock of HDFC Bank has least risk (variance-8.88),while share of KPIT Technologies has maximum risk (56.48).Therefore we can conclude that, assuming other parameters as same, a rational investor would give first preference to HCL Infosystems in IT Sector and Allahabad Bank and HDFC Bank in the Banking Sector as he would adopt the simple equation of minimising risk and maximizing returns.

It is clear from table 1 and the corresponding charts that in Information Technology sector all the stocks have P less than that of market (market or index's P is) 1. The stock of Polaris Technologies Ltd. has the highest beta value (0.98) followed by HCL Infosystems Ltd.(0.88) and Infosys Technologies Ltd. (0.54). The stock of NUT Technologies Ltd. has the lowest beta value (0.03) followed by KPIT Technologies Ltd. (0.21) and TCS (0.24). Beta value for NUT Technologies Ltd. is abnormally low and it indicates that fluctuations in its share prices have very little to do with fluctuations in the corresponding values of NIFTY. As far as total risk is concerned, share of KPIT Technologies Ltd. has maximum risk (variance-56.48), followed by Polaris Financial Technologies Ltd. (variance-35.67) and HCL Infosystems Ltd. (variance-24.97). TCS Ltd. is the stock with the least risk (variance-11.91) followed by HCL Technologies Ltd. (variance-12.9) and MindTree Ltd. (variance-13.77).
Jaipuria Institute of ManagementManagementDynamics, Volume 14, Number 1 (2014)

Charts 2.3: Systematic and Unsystematic Risk of Banking Stocks as Percentage of Total Risk:
Systematic Risk js % of Total Risk • UrSystcinatic Risk as % of Total Risk

It is clear from table 2 and the corresponding charts that in banking sector all the stocks have p more than that of market (market or index's p is) 1. The stock of Canara Bank has the highest beta value (1.92) followed by Punjab National Bank (1.87) and Allahabad Bank (1.83). The stock of HDFC Bank has the lowest beta value (1.07) among all the selected banking stocks followed by Kotak Bank (1.09) and Indusind Bank (1.52). Contrary to general belief, beta values of stocks of public sector banks are on an average higher than the beta values of stocks of private sector bank. Stock with lowest bet value (HDFC Bank) belongs to private sector while stock with highest beta value (Canara Bank) belongs to public sector. As far as total risk is concerned, share of Canara Bank has maximum risk (variance- 36.28), followed by Allahabad Bank (variance-34.83) and Punjab National Bank (variance-30.47). HDFC Bank is the stock with the least risk (variance-8.88) followed by Kotak Bank (variance-11.73) and ICICI Bank (variance-18.08). Total risk of all stocks of all the selected banks is quite evenly distributed between its two components i.e. systematic risk and unsystematic risk. It is also visible in the values of their coeflRcients of determination. These values are ranging from 0.4 to 0.6. Share of ICICI Bank Ltd. has the highest value of coeflHcient of determination (0.6) followed by HDFC Bank (0.53) and IDBI Bank and State Bank of India (0.52 each)Share of NUT Technologies Ltd. has the least value of coefficient of determination (0.0003). On the other hand stock of Allahabad Bank has the lowest coefficient of determination (0.40) followed by Canara Bank, Indusind Bank and Kotak Bank (0.42 each). In general we can say that around half of variance of the returns banking stocks can be explained by the variance of returns on NIFTY.
Jaipuria Institute of ManagementManagementDynamics, Volume 14, Number 1 (2014)