INDEX

SI
Contents Pg No.
No.

1. ABSTRACT 5
2.
INTRODUCTION 6-7

3. NEED FOR THE STUDY&PROBLEM 8

STATEMENT

4. SCOPE AND OBJECTIVES OF THE STUDY 9

5. RESEARCH METHODOLOGY 10-12

6. 13-15
LITERATURE REVIEW

7. CAPITAL ASSET PRICING MODEL 16-20

8. DATA ANALYSIS AND INTERPRETATION 21-32

9. FINDINGS 33-34

CONCLUSION 35
10.
REFERENCES 36-38
11.

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 ABSTRACT

A thorough examination of the Capital Asset Pricing Model, also known as the CAPM, as a
reliable framework for evaluating expected returns and assessing risks is provided in this
research report for a sample of financial market companies. Based on contemporary portfolio
theory, the CAPM model provides a methodical way to measure the correlation between risk
and expected return, enabling investors to make more well-informed decisions regarding
investments.

The theoretical framework of the CAPM is given at the beginning of the study, along with an
explanation of its mathematical formulation and underlying assumptions. The efficiency of the
model is then experimentally assessed by calculating the risk profiles and expected returns for a
diverse portfolio of stocks that span different sectors and industries.

We use historical market data, including stock prices and market risk-free rates, to determine the
expected earnings for the recommended stocks. In addition, we estimate each stock's systematic
risk, or beta, which expresses how sensitive it is to changes in the general market. We could use
this information to assess if the stocks exceeded or fell short of the returns expected by the
CAPM.
All things considered, this study is a great tool for researchers, investors, and financial analysts
because it provides information on how the CAPM model could be used to evaluate risks and
estimate expected returns for different equities. The results can assist interested parties in
streamlining their portfolio management and investment strategies, leading to better financial
decisions.

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 INTRODUCTION

To make well-informed decisions and maximize their investment strategies, investors and
portfolio managers need to be able to effectively estimate projected returns and analyze risks in
today's turbulent financial markets. One classic model that has been crucial to this process is the
Capital Asset Pricing Model (CAPM). The usefulness of the CAPM model in calculating
expected returns and evaluating risks for a properly chosen set of stocks is thoroughly examined
in this research study.

A key component of contemporary finance theory is the CAPM model, which was created by
William Sharpe, John Lintner, and Jan Mossin in the middle of the 20th century. The
fundamental idea of the model is that investors receive compensation for assuming systematic
risk, and it offers a methodical framework for calculating the link between risk and return. By
using this model, investors can ascertain whether, relative to the overall market, a particular
investment is likely to yield returns commensurate with the degree of risk it contains.

This research has significance since it addresses both expected return estimation and risk
evaluation at the same time. Expected returns serve as the cornerstone of investment decision-
making because they offer a logical framework for assessing how appealing investment
opportunities are. Simultaneously, risk assessment is essential to comprehending the possible
downside and volatility linked to a certain investment. The CAPM structure offers a systematic
approach to address these important characteristics.

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 To fully understand the applicability and limitations of the model, we have carefully chosen a
wide variety of stocks from different businesses and sectors. By using the CAPM framework
on these stocks, we want to ascertain whether the model's predictions correspond with actual
market performance. We are able to evaluate its practicality and efficacy in the current
investment environment thanks to this empirical method.

The research paper then analyzes the CAPM model, describing the assumptions and
theoretical foundations of the approach. Next, the model is applied to the chosen stocks by
measuring systematic risk and forecasting projected returns using historical market data. This
empirical investigation, which clarifies the model's performance in actual investing scenarios,
will aid in closing the theory-practice Gap.

The research report then digs into the CAPM model, explaining its theoretical basis and
assumptions. Next, the model is applied to the chosen stocks by measuring systematic risk and
forecasting projected returns using historical market data. This empirical investigation, which
clarifies how the model performed in actual investing scenarios, will be helpful in narrowing the
theory-practice gap.

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 NEED FOR THE STUDY

This study needs to be done because accurate expected return estimation and risk assessment are
crucial when making investment decisions. To evaluate the relative merits of different equities,
investors want trustworthy instruments, and the CAPM model is a popular framework.
However, a bridge between the theoretical and practical foundations of CAPM is required.

This study aims to assess the model's efficacy and offer insights that help enhance risk
management, portfolio diversification, and investor decision-making. In addition, its
conclusions have practical and academic ramifications, enhancing our knowledge of financial
markets and boosting investor confidence in unexpected markets.

PROBLEM STATEMENT

To estimate expected returns and evaluate risks for a wide range of equities, an extensive
examination of the Capital Asset Pricing Model (CAPM) is required. This research paper fulfills
this need. Despite being a well-established theoretical framework, there is ongoing discussion
on the practical applicability and efficacy of CAPM in actual investing circumstances. The
purpose of this study is to ascertain whether the Capital Asset Pricing Model (CAPM) is a
useful tool for investors and portfolio managers by systematically measuring risk and properly
forecasting expected returns when applied to a diverse portfolio of companies.

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 SCOPE OF THE STUDY

This study's scope includes a detailed analysis of the application of the Capital Asset Pricing Model
(CAPM) in predicting expected returns and evaluating risk for a carefully chosen group of companies
that represent different sectors and industries. The objective of the research is to evaluate the model's
efficacy, limitations, and performance empirically when it comes to actual investing scenarios. This
study uses the CAPM framework to analyze historical market data and produce insights that are
applicable to both academic research and practical problems financial and investment decision-making.

OBJECTIVES OF THE STUDY

The goals/objectives of the study are as follows:

 To evaluate the accuracy of the Capital Asset Pricing Model (CAPM) in predicting
expected returns for a diversified portfolio of equities by empirical means.
 The aim of this study is to evaluate the model's ability to quantify systematic risk,
specifically the beta coefficients of individual equities, and to assess its alignment
with market realities, suitability for investors, and utility for financial analysts.

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 RESEARCH METHODOLOGY

I. Estimate the Beta of Assets (βi):

Utilize regression analysis to determine each asset's beta. The asset's sensitivity to
changes in the market is indicated by its beta.

II. Determine the Standard Deviation of Assets (σi) and Standard Deviation of the
market (σm):
Determine each asset's standard deviation returns and standard deviation of the market
to gauge its level of risk. The volatility of the asset is measured by the standard
deviation.

III. Calculate Expected Returns (ERi) based on SML [ Security Market Line]:
Calculate the expected return for each asset in the portfolio using the CAPM formula
based on SML – purely Systematic Risk:
ERi = Rf + βi* (Rm - Rf)

Where,

ERi: Expected return for asset i Rf:

Risk-free rate

βi: Beta of asset i

Rm: Expected market return.

IV. Calculate Expected Returns (ERi) based on CML [ Capital Market Line]:
Calculate the expected return for each asset in the portfolio using the CAPM formula
based on CML – purely Unsystematic Risk:
ERi = Rf + (((Rm - Rf)/ σm)* σi)

Where,

ERi: Expected return for asset i

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 Rf: Risk-free rate

σi: Standard Deviation of asset i σm:

Standard Deviation of market Rm:

Expected market return

V. Find the Expected Return on a Portfolio (E(Rp)):

Using the weighted sum of the returns of each asset, calculate the expected return of the
portfolio:

E(Rp) = Σ [wi * ERi]

Where,

E(Rp): Expected return of the portfolio wi:

Weight of asset i in the portfolio ERi:

Expected return of asset i

VI. Determine the Optimal Portfolio:

Calculate the Treynor’s ratio for different combinations of asset weights to find the
optimal portfolio:

Treynor’s Ratio (T) = (Rp-Rf)/ β

Where,

T: Treynor’s ratio Rp:

Portfolio Return Rf:

Risk-free rate

β: Beta of asset

The best portfolio should be chosen based on the highest Treynor ratio.

It should be noted that creating an ideal portfolio with the Capital Asset Pricing Model (CAPM)

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requires making assumptions that may not hold true in real-world situations. It is essential to
carefully consider the model assumptions, data quality, and practical constraints when utilizing
this research approach to guide investment decisions.

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 LITERATURE REVIEW

Melissa Vergara-Fernandez a,, Conrad Heilmann a , Marta Szymanowska b

The explanation of the CAPM family has demonstrated the links between the different models
in the family. Based on our research, the relationships among the many models in the CAPM
family are complex and dynamic. We have demonstrated that they are differing degrees in
conceptual and experimental complements, which are two important ways in which they work
well together.

This analysis aims to assess the standing of a contentious family of theories, recognize the
contributions of M. Vergara-Fernandez et al. and advance the study of scientific fields using
model families. Descriptive analysis highlights the dynamic nature of a scientific area and the
various contributions of distinct models. Understanding this dynamic nature will help evaluate
the epistemic import of models.

Tim Bollerslev, Robert F. Engle and Jeffrey M. Wooldridge

The paper's results show that the conditional covariance matrix of asset returns is strongly
autoregressive, significantly influenced by conditional second moments of returns, and risk
premia are better represented by covariances with the implied market.

It can be done to develop more accurate econometric models that are not based on economic
theory and have richer risk premia specifications. Wider market definitions and the model's
sensitivity to market portfolio choice on a quarterly one-period horizon are still open questions..

Zainul Kisman , Shintabelle Restiyanita M.

The CAPM and APT models show that stock return is significantly influenced by its
independent variables, such as market excess return or GDP and interest rate. The Arbitrage
Pricing Theory (APT) model outperforms the Capital Asset Model (CAPM) in predicting stock
returns, with the APT model explaining 51.1% of the variation in stock returns, compared to
only 21.8% in the CAPM model.

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Michael C. Jensen and Myron Scholes

The study tested the traditional capital asset pricing model using securities listed on the New
York Stock Exchange between 1926 and 1966. The challenge was obtaining efficient estimates
of the beta factor mean and variance. Random selection was considered, but inefficient. The
study grouped securities into ten portfolios with large spreads in their betas to improve
efficiency. However, this method introduced selection bias due to measurement error. To
eliminate this, the previous period's estimated beta was used to select portfolio groupings for the
next year, resulting in unbiased beta estimates.

Valeed A Ansari

Research has raised doubts about the amount of evidence supporting the death of the factor
model (CAPM), leaving the argument unresolved. Whether factors may indicate aggregate risk
that is economically meaningful is the main topic of discussion. Though they don't have a
theory, Fama and French's arguments against p together cast doubt on CAPM. It also begs the
question of whether risk or other behavioral factors determine returns. the conflicting theories
and uncertainties related to. Based on empirical data, it appears that CAPM continues to be the
most favored instrument in corporate finance.

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Mike Dempsey

According to the capital asset pricing model (CAPM), markets make sense and can be studied
scientifically. However, because the factors employed to characterize asset returns do not
contribute to a strong risk-return relationship, contemporary models frequently fail to support
this. Due to this ignorance, there has been little effort made to develop a strong risk-return
relationship across assets, and instead, econometrics has been relied upon for data confirmation
and anomalies.

A "scientific" model of share prices is crucial for determining discount factors and valuing cash
flows. Without it, valuation attempts may appear "guesstimating," impacting academics and
professionals' reputations. It's essential to understand markets in their terms.

Konstantin Pavlikov and Stan Uryasev

In settings with one or more sample paths, the CAPM is used to improve the CDaR measure of
portfolio rates of return. The percentage of worst drawdowns is determined by the confidence
level. Financial instruments that provide protection against market downturns are ranked first by
CDaR beta and alpha. An alternate perspective on an instrument's hedging capabilities is offered
by the fact that the normal beta is positive whereas the CDaR beta can be negative.

Andre´ F. Perold

The Capital Asset Pricing Model (CAPM) significantly influences asset prices by revealing that
diversified investors' ownership lowers expected returns and increases prices, while
undiversified investors may take unrewarded risks. This model has influenced our
understanding of expected returns, risk allocation, performance measurement, and capital
budgeting.
Eugene F. Fama and Kenneth R. French

The Sharpe-Lintner CAPM risk-return relation, developed by Sharpe and Lintner, has not been
successful in empirical studies. The Black (1972) version, which combines market beta with
risk-free interest rate and average market risk premium, has had some success. However,
research in the late 1970s revealed additional variables, invalidating most applications of the
CAPM.

The CAPM is a portfolio model used to measure the performance of mutual funds and other
managed portfolios. However, its empirical failings can lead to abnormal returns in passively
managed stock portfolios. Funds focusing on low beta, small, or value stocks may produce
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positive abnormal returns. Despite its simplicity, the CAPM's empirical problems may
invalidate its use in applications, making it a theoretical tour de force.

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 CAPITAL ASSET PRICING MODEL

A common financial framework known as the Capital Asset Pricing Model (CAPM) analyzes
the correlation between an investment's systematic risk and expected return relative to the
market. The foundation of CAPM is the notion that investors ought to get compensation for
assuming systematic (market) risk, and the model uses the concept of beta to determine this
compensation. It offers a methodical technique for calculating the expected return of an
investment based on the risk compared to the overall market, giving investors a valuable tool to
evaluate the relative merits of different assets while taking the risk-reward trade-off into
account.

ASSUMPTIONS OF CAPM

Some fundamental assumptions constitute the Capital Asset Pricing Model (CAPM), such as:

 CAPM assumes that financial markets are perfectly competitive, with no restrictions
on trading or borrowing. This means that investors can buy and sell assets at any time
and in any amount without incurring transaction fees.
 The model assumes that every investor has the same goals for all assets in terms of
future returns, standard deviations, and correlations. In other words, there is
widespread agreement among investors on the model's inputs.
 The Risk-Free Rate CAPM is predicated on the existence of a risk-free asset with a
known, constant risk-free rate of return. This risk-free rate is free of default risk and
can be used to compare the risk-return trade-offs of other assets.
 CAPM assumes that asset relationships are linear, which means that asset returns are
directly related to beta coefficients. By assuming that the risk of a diversified portfolio
can be precisely calculated by aggregating the risk of its assets, this assumption
simplifies the model.

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 CONSTRUCTION OF AN OPTIMAL PORTFOLIO USING
CAPM

To maximize the expected return for a given degree of risk, you must determine the weights
of the various assets in your portfolio while building an optimal portfolio using CAPM. The
portfolio with the highest Treynor ratio and location on the Capital Market Line (CML) is the
ideal one. This is the methodical procedure using equations.

I. Estimate the Betas of Assets (βi):

Utilize regression analysis to determine each asset's beta. The asset's sensitivity to
changes in the market is indicated by its beta.

II. Determine the Standard Deviation of Assets (σi) and Standard Deviation of the
market (σm):
Determine each asset's standard deviation returns and standard deviation of the market
to gauge its level of risk. The volatility of the asset is measured by the standard
deviation.

III. Calculate Expected Returns (ERi) based on SML [ Security Market Line]:
Calculate the expected return for each asset in the portfolio using the CAPM formula
based on SML – purely Systematic Risk:
ERi = Rf + βi* (Rm - Rf)

Where,

ERi: Expected return for asset i Rf:

Risk-free rate

βi: Beta of asset i

Rm: Expected market return

IV. Calculate Expected Returns (ERi) based on CML [ Capital Market Line]:
Calculate the expected return for each asset in the portfolio using the CAPM formula
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 based on CML – purely Unsystematic Risk:
ERi = Rf + (((Rm - Rf)/ σm)* σi)

Where,

ERi: Expected return for asset i Rf:

Risk-free rate

σi: Standard Deviation of asset i σm:

Standard Deviation of

market

Rm: Expected market return

V. Find the Expected Return on a Portfolio (E(Rp)):

Using the weighted sum of the returns of each asset, calculate the expected return of the
portfolio:

E(Rp) = Σ [wi * ERi]

Where,

E(Rp): Expected return of the portfolio wi:

Weight of asset i in the portfolio ERi:

Expected return of asset i

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 VI. Determine Optimal Portfolio:
Calculate Treynor’s ratio for different combinations of asset weights to find the
optimal portfolio:

Treynor’s Ratio (T) = (Rp-Rf)/ β

Where,

T: Treynor’s ratio Rp:

Portfolio Return Rf:

Risk-free rate

β: Beta of asset

The best portfolio should be chosen based on the highest Treynor ratio.

VII. Modify the Weights of the Portfolio:

After you've determined which portfolio is best, make the necessary adjustments to the asset
weights in your portfolio. To maximize the Sharpe ratio and place the portfolio on the CML,
the weights should be set accordingly.

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 MERITS OF CAPM

In the context of portfolio management and asset pricing, CAPM is used to calculate the
expected return on investment. CAPM is a useful instrument in the banking industry because
of its many advantages. These include:

 CAPM's simplicity and accessibility make it suitable for a diverse range of users,
including investors, financial analysts, and finance students.
 CAPM provides a clear explanation of the risk-return tradeoff in investments,
suggesting higher returns for higher systematic risk, and serves as a benchmark for
investment evaluation.
 CAPM is a widely accepted benchmark in finance, used for evaluating investment
performance, setting goals, and assessing asset pricing, valuation, and portfolio
management.
 CAPM aids in capital budgeting decisions by determining discount rates and
sensitivity analysis by assessing the impact of the risk-free rate, market risk
premium, and asset beta on expected returns.
 CAPM promotes diversification in portfolios to minimize unsystematic risk, enabling
efficient risk-return tradeoffs through proper asset allocation.

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 LIMITATIONS OF CAPM

The Capital Asset Pricing Model has the following limitations:

 CAPM relies on numerous simplifying assumptions, such as perfect market conditions

and homogeneous investor expectations, which do not fully capture the complexities
of real-world financial markets.
 Assumption of Market Efficiency: Assuming perfect market efficiency, the model
suggests that asset prices already consider all available information. Expected and
actual returns may differ since markets aren't always efficient.
 Sole Reliance on Beta: The CAPM places a high value on an asset's beta as the sole
measure of risk. Other sources of risk, such as liquidity risk, interest rate risk, and
events that cannot be explained by market movements, may be overlooked and may
be critical in assessing risk in practice.

DATA ANALYSIS AND INTERPRETATION

The data analysis and interpretation for the current investigation are presented in this section
of the paper. Secondary sources were used to gather the data needed for this investigation.
For the study, fifteen businesses that are listed on the S&P BSE Sensex have been chosen.
The selected businesses are divided into many industry sectors. They are displayed below.

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 TABLE -1 - SAMPLE COMPANIES

SI NO. COMPANY NAME

1 Reliance Industries Ltd

2 Patanjali Foods

3 Tata Coffee

4 Apollo Tyres

5 Bajaj Auto

6 SBI

7 Nestle

8 Colgate

9 Sun Pharma

10 [Link]'s

11 ZEE Entertainment

12 ONGC

13 Liberty shoes

14 Karur Vysya bank

15 Khadim India

INTERPRETATION:

The above table is the list of example businesses chosen for this research.

For the seven years (2017–2023), the historical stock prices for the
companies it was collected from [Link].

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 TABLE-2

BETA VALUES OF THE SAMPLE COMPANY STOCKS

SI NO. COMPANY NAME BETA VALUES

1 Reliance Industries Ltd 0.067

2 Patanjali Foods 5.23

3 Tata Coffee -0.031

4 Apollo Tyers -0.08

5 Bajaj Auto -0.087

6 SBI 0.025

7 Nestle 0.019

8 Colgate -0.046

9 Sun Pharma -0.026

10 [Link]'s -0.041

11 ZEE Entertainment -0.042

12 ONGC -0.069

13 Liberty shoes 56.725

14 Karur Vysya bank -0.135

15 Khadim India -0.145

INTERPRETATION:

The list includes the companies' beta values, which show their historical volatility in relation to the
market. When a stock's beta is 1, it means that it moves in lockstep with the market; when a stock's
beta is 0, it means that its returns are not affected by movements in the market. A beta of more than
one indicates higher volatility, whereas a beta of less than one suggests lower [Link]
Industries Ltd stands out for having a low beta of 0.067, a sign of comparatively stable stock
performance. Patanjali Foods, on the other hand, has a high beta of 5.23, indicating a high degree of
market vulnerability.

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 Business with negative beta values, such as Bajaj Auto, Apollo Tyres, Tata Coffee, and
others, suggest that their returns follow an inverse connection with the market. With an
abnormally high beta of 56.725, Liberty Shoes stands out as potentially risky and subject to
significant volatility. All things considered, investors can utilize beta values to evaluate and
control portfolio risk by taking individual stock behavior and market trends into account.

TABLE-3

STANDARD DEVIATION FOR THE BELOW INDIVIDUAL COMPANIES AND THEIR

MARKET STANDARD DEVIATION

SI NO. COMPANY NAME σi σm

1 Reliance Industries Ltd 650.061 695.179

2 Patanjali Foods 604.862 695.179

3 Tata Coffee 69.143 695.179

4 Apollo Tyres 88.75 695.179

5 Bajaj Auto 863.552 695.179

6 SBI 141.186 695.179

7 Nestle 5628.95 695.179

8 Colgate 313.505 695.179

9 Sun Pharma 290.98 695.179

10 [Link]'s 1298.495 695.179

11 ZEE Entertainment 134.951 695.179

12 ONGC 35.494 695.179

13 Liberty shoes 65.249 695.179

14 Karur vysya bank 39.925 695.179

15 Khadim India 202.577 695.179

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 INTERPRETATION:

The information supplied gives an understanding of the volatility of each company by

providing the standard deviation (σi) for individual companies and the market standard
deviation (σm). Compared to the market (σm = 695.179), Reliance Industries Ltd exhibits
higher volatility, as indicated by its σi of 650.061. High σi readings indicate heightened
volatility for Patanjali Foods, Bajaj Auto, and Nestle. Bajaj Auto stands out with a
considerable σi of 863.552. Liberty Shoes and ONGC, on the other hand, show lower σi
levels, which suggest comparatively less volatility. Investors must comprehend these
standard deviations to evaluate the risk of each company relative to the market. Increased
volatility can lead to bigger profits, but it also carries a higher risk, which emphasizes the
importance of having a well-diversified and balanced portfolio with an investing plan
customized to each person's financial objectives and risk tolerance.

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 TABLE-4

EXPECTED RETURN BY SML METHOD – SYSTEMATIC RISK

SI NO. COMPANY NAME Rm Rf BETA SML

VALUES ( ERi)

1 Reliance Industries -101.826 6.50% 0.067 -6.8

Ltd

2 Patanjali Foods 5.23 -532.789

3 Tata Coffee -0.031 3.26

4 Apollo Tyres -0.08 8.257

5 Bajaj Auto -0.087 8.921

6 SBI 0.025 -2.49

7 Nestle 0.019 -1.874

8 Colgate -0.046 4.729

9 Sun Pharma -0.026 2.752

10 [Link]'s -0.041 1.468

11 ZEE Entertainment -0.042 4.319

12 ONGC -0.069 7.122

13 Liberty shoes 56.725 -5779.69

14 Karur Vysya bank -0.135 13.833

15 Khadim India -0.145 14.789

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 SI NO. COMPANY NAME ERp SML PRICING

1 Reliance Industries -0.404 -6.8 UNDERPRICED

Ltd

2 Patanjali Foods -10.437 -532.789 UNDERPRICED

3 Tata Coffee 0.018 3.26 OVERPRICED

4 Apollo Tyres 0.07 8.257 OVERPRICED

5 Bajaj Auto 1.037 8.921 OVERPRICED

6 SBI -0.033 -2.49 UNDERPRICED

7 Nestle -1.01 -1.874 UNDERPRICED

8 Colgate 0.234 4.729 OVERPRICED

9 Sun Pharma 0.065 2.752 OVERPRICED

10 [Link]'s 0.189 1.468 OVERPRICED

11 ZEE Entertainment 0.048 4.319 OVERPRICED

12 ONGC 0.035 7.122 OVERPRICED

13 Liberty shoes -38.551 -5779.69 UNDERPRICED

14 Karur vysya bank 0.04 13.833 OVERPRICED

15 Khadim India 0.167 14.789 OVERPRICED

INTERPRETATION:

The data gives details about the Security Market Line (SML), Beta Values, Market Return
(Rm), and Risk-Free Rate (Rf) for different companies. Reliance Industries Ltd.'s Expected
Rate of Return (ERi) is below the Risk-Free Rate, indicating a possible underperformance
and its low beta of 0.067 suggests a decreased vulnerability to market swings. Patanjali Foods
has a negative ERi, indicating that its expected return is not aligned with its risk, despite
having a notable high beta of 5.23. Some firms, like Bajaj Auto, Apollo Tyres, and Tata
Coffee, have Security Market Line (SML) values that indicate their ERi is in reasonable
alignment with their beta values. With an extraordinarily high beta and a highly negative ERi,
Liberty Shoes stands out as having a notable discrepancy.

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 between its expected return and risk. This data emphasizes how critical it is to evaluate
individual equities considering market dynamics and the SML, assisting investors in making
well-informed choices based on trade-offs between risk and reward.

TABLE-5

EXPECTED RETURN BY CML METHOD –UNSYSTEMATIC RISK

SI COMPANY Rm Rf σi σm CML
NO. NAME (ERi)

1 Reliance -101.826 6.50% 650.061 695.179 -95.213

Industries Ltd

2 Patanjali Foods 604.862 -88.588

3 Tata Coffee 69.143 -10.069

4 Apollo Tyres 88.75 -12.943

5 Bajaj Auto 863.552 -126.504

6 SBI 141.186 -20.628

7 Nestle 5628.95 -824.956

8 Colgate 313.505 -45.85

9 Sun Pharma 290.98 -42.583

10 [Link]'s 1298.495 -190.252

11 ZEE 134.951 -19.714

Entertainment

12 ONGC 35.494 -5.137

13 Liberty shoes 65.249 -9.498

14 Karur Vysya 39.925 -5.787

bank

15 Khadim India 202.577 -29.626

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 SI NO. COMPANY NAME ERp CML PRICING

1 Reliance Industries -0.404 -95.213 UNDERPRICED

Ltd

2 Patanjali Foods -10.437 -88.588 UNDERPRICED

3 Tata Coffee 0.018 -10.069 UNDERPRICED

4 Apollo Tyres 0.07 -12.943 UNDERPRICED

5 Bajaj Auto 1.037 -126.504 UNDERPRICED

6 SBI -0.033 -20.628 UNDERPRICED

7 Nestle -1.01 -824.956 UNDERPRICED

8 Colgate 0.234 -45.85 UNDERPRICED

9 Sun Pharma 0.065 -42.583 UNDERPRICED

10 [Link]'s 0.189 -190.252 UNDERPRICED

11 ZEE Entertainment 0.048 -19.714 UNDERPRICED

12 ONGC 0.035 -5.137 UNDERPRICED

13 Liberty shoes -38.551 -9.498 OVERPRICED

14 Karur vysya bank 0.04 -5.787 UNDERPRICED

15 Khadim India 0.167 -29.626 UNDERPRICED

INTERPRETATION:

The data shows the Expected Return (ERi) for different corporations using the Capital
Market Line (CML) technique, which accounts for unsystematic risk. Systematic and
unsystematic risk are both included in the CML, enabling a more thorough assessment of
predicted returns. With its risk profile, Reliance Industries Ltd.'s ERi of -95.213 indicates a
possible underperformance. Several businesses, like Patanjali Foods, have negative ERi
values, which suggest that their inherent risk and projected returns are not aligned. Notably,
ERi ratings for Bajaj Auto, SBI, and Dr. Reddy's are more in line with their risk profiles.
With a noticeably negative ERi, Liberty Shoes stands out and indicates a substantial disparity
between risk and expected return, which calls for cautious scrutiny. This methodology helps
investors comprehend risk-adjusted returns more fully by highlighting the significance of
taking both systematic and unsystematic risk into account when assessing investment
possibilities.
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 TABLE-6

PORTFOLIO EXPECTED RETURN

SI NO. COMPANY NAME ERi WEIGHT ERp

1 Reliance Industries Ltd -6.8 5.93 -0.404

2 Patanjali Foods -532.789 1.96 -10.437

3 Tata Coffee 3.26 0.54 0.018

4 Apollo Tyres 8.257 0.84 0.07

5 Bajaj Auto 8.921 11.63 1.037

6 SBI -2.49 1.33 -0.033

7 Nestle -1.874 53.88 -1.01

8 Colgate 4.729 4.94 0.234

9 Sun Pharma 2.752 2.35 0.065

10 [Link]'s 1.468 12.91 0.189

11 ZEE Entertainment 4.319 1.12 0.048

12 ONGC 7.122 0.49 0.035

13 Liberty shoes -5779.69 0.67 -38.551

14 Karur vysya bank 13.833 0.29 0.04

15 Khadim India 14.789 1.13 0.167

-48.532

INTERPRETATION:

The weighted contribution of each firm to the overall performance of the portfolio is indicated
by the portfolio's anticipated return data. With a positive projected return, Bajaj Auto stands
out as a noteworthy contributor that positively affects the overall returns of the portfolio.
Nonetheless, Patanjali Foods and Liberty Shoes stand out because of their unusually poor
projected returns, which suggests that they may significantly hinder the performance of the
portfolio.

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 Reliance Industries Ltd. makes a negative contribution as well, suggesting that it may have
performed below par for its weight. The predicted return of the portfolio is negatively
impacted by Nestle, even with its significant weight. The data highlights how important it is
to diversify and give every stock performance significant thought since both good and
negative factors can affect the total performance of a portfolio. To maximize returns,
investors should regularly review and adjust their holdings with the risk adjusted.

TABLE-7

TREYNOR’S PERFORMANCE INDEX

SI NO. COMPANY NAME BETA Rp Rp-Rf Rp-Rf/β

VALUES

1 Reliance Industries Ltd 0.067 17.831 17.766 265.1642

2 Patanjali Foods 5.23 3366.231 3366.166 643.6264

3 Tata Coffee -0.031 15.715 15.65 -504.839

4 Apollo Tyres -0.08 10.95 10.889 -136.113

5 Bajaj Auto -0.087 10.436 10.371 -119.207

6 SBI 0.025 14.312 14.247 569.88

7 Nestle 0.019 21.552 21.488 1130.947

8 Colgate -0.046 12.568 12.503 -271.804

9 Sun Pharma -0.026 15.252 15.187 -584.115

10 [Link]'s -0.041 18.094 18.03 -439.756

11 ZEE Entertainment -0.042 -8.741 -8.807 209.6905

12 ONGC -0.069 3.727 3.663 -53.087

13 Liberty shoes 56.725 6.825 6.761 0.119189

14 Karur vysya bank -0.135 17.144 17.079 -126.511

15 Khadim India -0.145 8.491 8.426 -58.1103

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 INTERPRETATION:

Beta values, Rp (expected rate of return), Rp-Rf (excess return above the risk- free rate), and
Rp-Rf/β (risk premium per unit of systematic risk) are among the financial metrics for
various organizations that are displayed in the table. With a notably high Beta of 5.23, which
denotes a high systemic risk, Patanjali Foods stands out. This results in a high Excess Return
above the Risk-Free Rate (Rp- Rf) of 3366.166 and a significant Expected Rate of Return
(Rp) of 3366.231. Nevertheless, the Risk Premium per Unit of Systematic Risk (Rp-Rf/β) is
643.6264 when systematic risk is considered, indicating a correspondingly smaller payoff for
the degree of risk. Conversely, businesses with good Rp-Rf/β values, such as Nestle and SBI,
have a strong risk-reward profile. Liberty Shoes has a 56.725 beta coefficient and has a low-
risk Premium per Unit of Systematic Risk (Rp-Rf/β), indicating that the degree of risk may
not be sufficiently compensated even with large profits. On the other hand, firms with
negative Rp-Rf/β ratios, such as Tata Coffee and ONGC, indicate that their returns could not
be enough considering their degree of systematic risk. In general, this approach emphasizes
the trade-off between systemic risk and expected returns, giving investors the knowledge they
need to make wise choices depending on their risk tolerance and return goals.

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 FINDINGS

1. The beta values table shows the vulnerability of equities to market changes. Reliance
Industries Ltd has a low beta, indicating stability, while Patanjali Foods has a high
beta, indicating volatility.
2. Other businesses, like Apollo Tyres, Bajaj Auto, and Tata Coffee, have negative beta
levels, indicating an inverse relationship with the market. These results help investors
customize their portfolios based on return goals and risk tolerance.
3. The standard deviation values table reveals the volatility levels of listed companies,
with Bajaj Auto showing the largest variation, while Liberty Shoes and ONGC show
smaller values, suggesting stable price swings. These findings help investors create a
well-diversified portfolio that aligns with their risk tolerance and objectives.
4. The relationship between anticipated returns and beta systematic risk is shown in the
Security Market Line (SML) values table.
5. Companies with similar scores, like Bajaj Auto and Dr. Reddy's, show proportionate
predicted returns to systematic risk, highlighting the importance of risk-return trade-
offs in investing decisions.
6. The Capital Market Line (CML) values table reveals expected returns adjusted for
systematic and unsystematic risk. Reliance Industries Ltd, Patanjali Foods, Bajaj
Auto, and Dr. Reddy’s have negative CML values, indicating potential
underperformance.
7. These findings emphasize the importance of considering both systematic and
unsystematic risks when evaluating individual stocks' risk-adjusted performance
within a portfolio.
8. Companies' performance varies widely, as the portfolio anticipated return analysis
reveals. Because of its large weight in the portfolio, Bajaj Auto has a positive effect
on the overall predicted return.

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 9. The negative ERi values of Liberty Shoes and Patanjali Foods suggest possible
hazards. Because of its large portfolio weight, Nestle has a favorable effect even with
a negative individual ERi. The results underscore the significance of portfolio weights
and individual business success in influencing overall returns.
10. The information shows the risk-return profiles of several businesses; Patanjali Foods
has a high beta and notable total returns of 3366.231. High excess returns over the
risk-free rate and ratio, however, point to significant risk. Businesses with negative
betas include Bajaj Auto, Tata Coffee, Apollo Tyers, and SBI. On the other hand,
Liberty Shoes has limited total returns while SBI has a good Rp-Rf/β ratio.

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 CONCLUSION

In conclusion, the beta values table shows how sensitive equities are to changes in the
market. Reliance Industries Ltd. shows stability, whereas Patanjali Foods exhibits volatility.
Negative beta values for certain businesses suggest that they have the opposite relationship to
the market. The standard deviation figures show the levels of volatility; Bajaj Auto has the
biggest variance, while ONGC and Liberty Shoes have lower swings. The Security Market
Line values highlight how important it is to weigh risk against reward when making investing
decisions. Portfolio weights and individual firm performance have an impact on total returns.

Investors should evaluate these findings holistically, considering not only individual
performance but also portfolio diversification, risk reduction, and alignment with their
investment objectives.

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