Research METHODOLOGY

Collecting data from various sources which are secondary sources of data carried
on the research. The data were collected from leading websites which are meant
exclusively for tracking market data the theoretical part explained in this text was
collected from text books written by famous authors who are well know for their
writing skills and who have an ocean of experience in the teaching field.

The methodology carried in the project is descriptive along with the

requisite analysis the data sources of the study are

Primary collection methods:

This method includes the data collection from the personal discussion with the
authorized clerks and members of the exchange.

Secondary collection methods:

The secondary collection methods includes the lectures the of the superintend of
the department of market operations and so on,. Also the data collected from the
news, magazines of the ISE are different books issues of this study.
LIMITATIONS OF THE STUDY
 The area of study is limited to few sectors of group a stock.

 The study is limited to data of the last three months only.

 Risk cannot be measured accurately as the market condition is always

fluctuating and uncertain.

 The study is mainly based on secondary data and no field work is done
because of time constraint.

 To analyze the risk and return only standard deviation and beta is used and
no other statistical tools are used
 CHAPTER-3
THEORITICAL FRAME WORK
 SUBJECT BACKGROUND OF THE RESEARCH TOPIC:

A company ,which has a high intrinsic worth ,is not necessarily the best stock to
buy .it may have no growth prospects or it may be overpriced .similarly a company
that performs well during any one year may not be the best to buy .on the contrary
,a company which has been badly for sometime might have turn the corner and it
may be the best to buy ,as its shares may be under prices and it has good prospects
of growth hence an analysis of risk or return guides an investor in proper profitable
investment .
RETURN

Return is the primary motivating force that drives investment .it represents
the reward for undertaking investment .since the game of investing is about
returns, measurement of realized return is necessary to assess how well the
investment manager has done. In addition historical return is often used as an
important input on estimating future return.
THE COMPONENT OF RETURN

The return of an investment consist of two component

Current return the component that often comes to mind when one is thinking about
return is the periodic cash flow such as dividend or interest generated by the
investment .current return is measured as the periodic income in relation to the
beginning price of the investment. Capital return the second component of return is
reflected in the price change called the capital return .it is simply the price appreciation
(or depreciation) divided by the beginning price of the assets.
Thus total return =current return + capital return
RISK:

Risk refers to the possibility that the actual outcome of an investment will differ from its
expected outcome .more specifically, most investors are concerned about the actual
outcome being less than the expected outcome .the wider the range of possible
outcomes the greater the risk.

Risk management:

Risk management is the identification, of risks followed by

coordinated and economical application of resources to minimize, monitor, and
control the probability and/or impact of unfortunate events or to maximize the
realization of opportunities The strategies to manage risk include transferring the
risk to another party, avoiding the risk, reducing the negative effect of the risk, and
accepting some or all of the consequences of a particular risk.

In ideal risk management, a prioritization process is

followed whereby the risks with the greatest loss and the greatest probability of
occurring are handled first, and risks with lower probability of occurrence and
lower loss are handled in descending order. In practice the process can be very
difficult, and balancing between risks with a high probability of occurrence but
lower loss versus a risk with high loss but lower probability of occurrence can
often be mishandled.

Intangible risk management identifies a new type of a risk

that has a 100% probability of occurring but is ignored by the organization due to a
lack of identification ability.
Method:

. For the most part, these methods consist of the following elements, performed, more or less, in
the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of
attacks on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy
Principles of risk management
The International Organization for Standardization (ISO) identifies
the following principles of risk management:

Risk management should:

 create value
 be an integral part of organizational processes
 be part of decision making
 explicitly address uncertainty
 be systematic and structured
 be based on the best available information
 be tailored
 take into account human factors
 be transparent and inclusive
 be dynamic, iterative and responsive to change
THE BENEFITS OF RISK MANAGEMENT

Proper risk management allows a financial institution to prosper through taking

and avoiding risks. Well run companies are now taking a closer interest in what its
management is doing to mitigate risk exposure, allowing for a more efficient,
effective and prudently run business.

The recently published Turnbull Guidance on Internal

Control has focused attention not just on downside risk, but also on the positive
aspects of risk. For the first time, the link between risk management and improved
business performance is acknowledged in governance regulations.

Good risk management enables companies to seize opportunities, as well as

prevent disasters.

Summary of benefits

The benefits of effective risk management and internal control are:

 Increased risk awareness

 Prioritization of business risks to those that matter
 Fewer unexpected and unwelcome surprises
 A better focus internally on doing the right things well
 Reduced losses through process improvements developed by the business
 Providing a better basis for making key strategic decisions
 Increasing the chance of change initiatives being achieved
NEED FOR RISK MANAGEMENT
Whether your need is to
• maximize your resources,
• demonstrate staff competence
• undertake obligatory Health and Safety procedures and risk assessments
• retain crucial records for the necessary 20 years:

Establishing the context:

Establishing the context involves:

1. Identification of risk in a selected domain of interest

2.
3. Planning the remainder of the process.
4. Mapping out the following:
 the social scope of risk management
 the identity and objectives of stakeholders
 the basis upon which risks will be evaluated, constraints.
5. Defining a framework for the activity and an agenda for identification.
6. Developing an analysis of risks involved in the process.
7. Mitigation or Solution of risks using available technological, human and
organizational resources.

Identification:
After establishing the context, the next step in the process of managing risk is to identify
potential risks. Risks are about events that, when triggered, cause problems. Hence, risk
identification can start with the source of problems, or with the problem itself.

Source analysis: Risk sources may be internal or external to the system that is the target
of risk management.
Examples of risk sources are: stakeholders of a project, employees of a company or the
weather over an airport.
Problem analysis: Risks are related to identified threat . When either source or problem is known,
the events that a source may trigger or the events that can lead to a problem can be investigated. For
example: stakeholders withdrawing during a project may endanger funding of the project; privacy
information may be stolen by employees even within a closed network; lightning striking an aircraft
during takeoff may make all people onboard immediate casualties.

The chosen method of identifying risks may depend on culture,

industry practice and compliance. The identification methods are formed by templates
or the development of templates for identifying source, problem or event. Common risk
identification methods are:

Objectives-based risk identification Organizations and project teams have objectives.

Any event that may endanger achieving an objective partly or completely is identified
as risk.

Scenario-based risk identification In scenario analysis different scenarios are created.

The scenarios may be the alternative ways to achieve an objective, or an analysis of the
interaction of forces in, for example, a market or battle. Any event that triggers an
undesired scenario alternative is identified as risk - see Futures Studies for
methodology used by Futurists.

Taxonomy-based risk identification The taxonomy in taxonomy-based risk

identification is a breakdown of possible risk sources. Based on the taxonomy and
knowledge of best practices, a questionnaire is compiled. The answers to the questions
reveal risks.

Common-risk checking In several industries, lists with known risks are available. Each
risk in the list can be checked for application to a particular situation.

Risk charting This method combines the above approaches by listing resources at risk,
Threats to those resources Modifying Factors which may increase or decrease the risk
and Consequences it is wished to avoid. Creating a matrix under these headings enables
a variety of approaches. One can begin with resources and consider the threats they are
exposed to and the consequences of each. Alternatively one can start with the threats
and examine which resources they would affect, or one can begin with the
consequences and determine which combination of threats and resources would be
involved to bring them about.
Assessment
Once risks have been identified, they must then be assessed as to their potential severity
of loss and to the probability of occurrence. These quantities can be either simple to
measure, in the case of the value of a lost building, or impossible to know for sure in the
case of the probability of an unlikely event occurring. Therefore, in the assessment
process it is critical to make the best educated guesses possible in order to properly
prioritize the implementation of the risk management plan0.

The fundamental difficulty in risk assessment is determining the rate of occurrence

since statistical information is not available on all kinds of past incidents. Furthermore,
evaluating the severity of the consequences (impact) is often quite difficult for
immaterial assets. Asset valuation is another question that needs to be addressed. Thus,
best educated opinions and available statistics are the primary sources of information.
Nevertheless, risk assessment should produce such information for the management of
the organization that the primary risks are easy to understand and that the risk
management decisions may be prioritized. Thus, there have been several theories and
attempts to quantify risks.

Numerous different risk formulae exist, but perhaps the most widely accepted formula
for risk quantification is: Rate of occurrence multiplied by the impact of the
event equals risk

Financial risk management:

Financial risk management is the practice of creating economic value in a firm by

using financial instruments to manage exposure to risk, particularly credit
risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector,
Liquidity, Inflation risks, etc. Similar to general risk management, financial risk
management requires identifying its sources, measuring it, and plans to address them.

Financial risk management can be qualitative and quantitative. As a specialization

of risk management, financial risk management focuses on when and how
to hedge using financial instruments to manage costly exposures to risk.
In the banking sector worldwide, the Basel Accords are generally adopted by
internationally active banks for tracking, reporting and exposing operational, credit and
market risks.

When To Use Financial Risk Management:

Finance theory prescribes that a firm should take on a project when it
increases shareholder value. Finance theory also shows that firm managers cannot
create value for shareholders, also called its investors, by taking on projects that
shareholders could do for themselves at the same cost.

When applied to financial risk management, this implies that firm managers should not
hedge risks that investors can hedge for themselves at the same cost. This notion was
captured by the hedging irrelevance proposition: In a perfect market, the firm cannot create
value by hedging a risk when the price of bearing that risk within the firm is the same as
the price of bearing it outside of the firm. In practice, financial markets are not likely to be
perfect markets.

The concepts of financial risk management change dramatically in the international

realm. Multinational Corporations are faced with many different obstacles in
overcoming these challenges. There has been some research on the risks firms must
consider when operating in many countries, such as the three kinds of foreign exchange
exposure for various future time horizons, transactions exposure, accounting
exposure, and economic exposure.

Mega projects (sometimes also called "major programs") have been shown to be
particularly risky in terms of finance. Financial risk management is therefore
particularly pertinent for mega projects and special methods have been developed for
such risk management.