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Risk and Return
Risk and Return
Abstract
The report focuses on the risk and return analysis of Everest Bank. Risk in the study is
measured by the standard deviation and coefficient of variation. The study analyses the
risk and expected return of Everest Bank with its comparison to Nabil Bank which is one of
the leading banks in Nepal. The comparison of risk and return is mainly focussed on the
Everest Bank and Nabil bank is selected for comparative study. The study has indicated
that Everest Bank has high risk in terms of high standard deviation and high coefficient of
variation but the return from the bank is low. So, there is no risk-return trade-off for the
Everest bank, since taking high risk in the stock of Everest bank has not resulted in high
returns for the investors. Further, the systematic risk which cannot be diversified has
higher proportion in Everest bank which is not a comfortable situation for the investors.
The study tries to present the relationship between the risk and return of common stock in
the commercial banking sector of Nepal. It is essential to analyse the risk and return as it
plays vital role in decision making for investment in any stock.
Table of Contents
6BU013 Independent Project 2040721
Abstract............................................................................................................................................................2
Chapter 1: Introduction....................................................................................................................................5
1.1. Research Background.......................................................................................................................5
1.1.1. Banking Sector History in Nepal................................................................................................5
1.1.2. Brief profile of Everest Bank.....................................................................................................5
1.2. Significance of the Study...................................................................................................................5
1.3. Statement of Problem......................................................................................................................6
1.4. The objective of the Study................................................................................................................6
Chapter 2: Literature Review............................................................................................................................7
2.1. Introduction...........................................................................................................................................7
2.2. Understanding Investment....................................................................................................................7
2.3. Understanding Common Stock.............................................................................................................7
2.4. Market Price per Share (MPS)...............................................................................................................7
2.5. Understanding Earnings per Share (EPS)..............................................................................................8
2.6. Understanding Dividend per Share.......................................................................................................8
2.7. Price to Earnings ratio...........................................................................................................................8
2.8. Expected Rate of Return.......................................................................................................................9
2.9. Risk and Risk Types...............................................................................................................................9
2.9.1. Systematic Risk...................................................................................................................................9
2.9.2. Unsystematic Risk...............................................................................................................................9
2.10. The CAPM model...............................................................................................................................10
2.9. Relation between Risk and Return......................................................................................................10
2.11. Risk Measurement.............................................................................................................................11
2.12. Gap Analysis......................................................................................................................................11
Conceptual Framework..............................................................................................................................12
Chapter 3: Research Methodology.................................................................................................................12
3.1. Research design...................................................................................................................................12
3.2. Research Variables...............................................................................................................................13
3.3. Data collection methods......................................................................................................................13
3.4. Limitation of the study.........................................................................................................................13
3.4. Ethical considerations..........................................................................................................................13
Chapter 4: Presentation and Data Analysis....................................................................................................14
4.1. Analysis of Market price per share, Earnings per share, Dividend and P/E ratio of Everest Bank Limited
....................................................................................................................................................................... 14
4.2. Analysing Standard Deviation, Expected Return, Coefficient of Variation and Variance for Everest and
Nabil banks.....................................................................................................................................................16
4.3. Comparison of risk and return of both the banks...................................................................................18
4.4. Comparing the risk and return with the market......................................................................................19
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Chapter 1: Introduction
The first commercial bank in Nepal, Nepal Bank Limited was established in 1937 as a joint
venture with the government of Nepal and the private sector (Nepal Rastra Bank, 2016).
Before the formation of the central bank of Nepal “Nepal Rastra Bank” in 1956, Nepal
Bank Limited was the only banking institute in the country. Nepal Bank was established
with an authorized capital of NR 1 crore with the government of Nepal holding 51% of
shares while the public holding was limited to 49% shares (Investopaper, 2021). Nepal
Rastra Bank as a central bank in Nepal was established in 1956 under the Nepal Rastra
Bank Act, 1955 to guide the development of the domestic financial sector and discharge
the responsibilities of a central bank (Nepal Rastra Bank, n.d.). Nepal Rastra Bank started
issuing Nepalese currency on the behalf of the government in 1959 (Nepal Rastra Bank,
2016).
The private banking sector in Nepal started in the year 1984 after the establishment of
Nabil bank as the first private bank of Nepal and some other foreign banks such as Nepal
Grind lays, Nepal Indosuez, and Nepal Arab bank also started their operation in Nepal.
Due to the political instability and conflicts in Nepal over the years, the banking sector has
faced a lot of obstacles. However, in the present situation, the banking industry has
become strong and is capable to stand still. In Nepal, the banking and financial institution
includes 20 Development banks, 27 Commercial banks, 85 Micro-finance institutions and
22 Finance companies (Nepal Rastra Bank, 2020).
Significance to the Creditors: Creditors are one of the stakeholders of the banks
who lend their money to the banks. So, they need to know the financial
performance of the banks along with risks involved and return provided by the
banks before providing credit or loans to the financial institutions.
Significance to the Researcher: The research study will further enhance the
literature for understanding the risks and return of the common stocks of the banks
and different concepts and aspects related to risk and return. Further, the study will
assist future researchers who are interested in research in this field.
2.1. Introduction
This chapter will explain various concepts which are useful in analyzing the risk and return
level in common stocks of commercial banks. Conceptual understanding of Investment,
market price per share, earnings per share, dividend per share, expected rate of return,
the relation between risk and return, various types of risk, risk measurement, and
theoretical aspects of analyzing the risk and return will be presented which will be based
on research finding of various authors. The literature review will assist in gaining
appropriate feedback which in turn will help in broadening the information-based input for
my research (Rowley and Slack, 2004).
2.2. Understanding Investment
The dictionary meaning of Investment explains it as an expenditure made usually to make
profit or income (Merriam-Webster dictionary, n.d.). Investment is utilizing the resources
that have been earned and saved at present in expectation to generate income at a
particular rate of return in the future. As quoted by Virlics (2013), investment refers to an
allocation of resources for medium and long periods with an expectation to recover the
cost of investment so that profits can be made. The return on the investment depends on
the risk involved in the investment and the risk in investment is variability in the expected
returns or a possibility of loss (Senthilnathan, 2016).
2.3. Understanding Common Stock
Common Stock also known as the ordinary share is the ownership share in a company
which provides shareholders the right to vote in shareholder’s meeting. The holder of the
common stocks earns dividends which the company decides to distribute among the
common shareholders. Common stock is a source of long-term funding for the company
and is ownership security. Common Stocks are marketable securities that are bought and
sold on the respective stock exchanges of the concerned country. Common stocks have a
risk of having the last claim on the asset of the company during liquidation (Kandel, 2018).
2.4. Market Price per Share (MPS)
The market price per share is the amount of money which is investors are ready to pay for
holding one share of the company. The market price of the share is an important factor in
making an investment decision and market price per share depends on market forces like
demand and supply as well fundamental factors like the financial performance of the
company, liquidity in the market, government policy, investor sentiments, and technical
influence such as past trend analysis (Sunde and Sanderson, 2009). As suggested by
Sharif, Purohit, and Pillai (2015), the prominent factors that affect the price of a share are
dividend, profitability, operating performance, and book value. Therefore, in making an
investment decision, market price per share can be considered as an important factor that
can be further analyzed to understand where a particular share is overpriced or under-
priced.
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valuation of shares of a company and helps in the market assessment of the performance
of the company.
2.8. Expected Rate of Return
The expected rate of return is the return expected by the investors over some future
period. It can be termed as a prediction of return which is subject to uncertain condition.
The expected rate of return is calculated using the mean to derive the estimation for the
future. It can be understood as the arithmetic mean of the return that has been realized in
the previous periods. The expected rate of return should be greater or equal to the
required rate of return for the investment to be viable (Koh Xin Rui et al., 2018).
2.9. Risk and Risk Types
Risk can be termed as the volatility in the expected return or possibility of loss. When there
is a high possibility of loss or if there is high volatility possible return concerning an
investment in stocks, the stock investment can be considered risky (Senthilnathan, 2013).
The variability in the rates of return across various stocks at a different level, given an
indication of the presence of risk and return relationship in the stock market (Kandel,
2018). There can be different sources of risk that impact both organizations and their
shareholders. There can be risks specific to the company like business and financial risks,
risks specific to shareholders like market risk, interest rate risk, and liquidity risks, and
risks that are specific to both firms and shareholders like event risk, tax risk, and
purchasing power risk (Senthilnathan, 2013). Different investors have different attributes
towards the risk, some investors can be risk-neutral, some can be risk-averse and some
are risk-seeking. In the context of risk and return analysis of the stock of commercial banks
and as per the CAPM model, major risk will be divided among systematic risks and
unsystematic risk.
2.9.1. Systematic Risk
Systematic risk refers to the risk that cannot be diversified and related to the market. This
type of risk is present in the entire industry and or some part of the market. Such risk is
caused by the changes in the market or economic condition which affects everyone and
thus, cannot be diversified (John and Boateng, 2017). So, mitigation of the systematic risk
cannot be done by diversification. The sources of the systematic risk that impact the
returns of stocks and creates volatility can be changes in the rate of interest, changes in
inflation, changes in the expectation of the investors regarding the overall performance of
the economy. Systematic cannot be eliminated or mitigated using diversification, thus such
risks are the major determinant of the risk premium in the individual stocks (Senthilnathan,
2013). The beta coefficient represents the systematic risk as per the CAPM model. Thus,
systematic risk is the non-diversifiable market risk.
2.9.2. Unsystematic Risk
The unsystematic risk can be understood as the variation in the expected return that is
caused by the factors which are inherent to the stock itself. This kind of risk can be
mitigated by diversification of the portfolio of securities. It is the risk that applies to only a
small group of securities or single security (Senthilnathan, 2013). Using a combination of
various stocks for different industries within the portfolio can be useful in diversification so
that unsystematic risk can be minimized (Koh Xin Rui et al., 2018). The various sources of
the unsystematic risk can be risk related to management capabilities and management
decisions, labor strikes, competition, availability of raw materials. Since unsystematic risks
can be managed by the organization by internal control and can be fully eliminated but
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To analyze the risk and return patterns of various commercial banks in Nepal, very few
articles have been published and such articles have been reviewed in this research study
to gain more insights from the previous research on a similar topic. The study conducted
by Kandel (2018), analyses the risk and return of commercial banks in Nepal and he had
found that the banks considered for the study, were risky with high volatility in the
expected rate of return. The study also mentioned that the stock price of commercial
banks selected was overpriced as the required rate of return was found to be more than
the expected rate of return. Another study conducted by Rao, Podile, and Navvula (2020)
which analyses the risk and return of selected banks from the Indian stock exchange,
states that a combination of high return and low risk is preferred by the investors. The
evidence from the study showed that there were banks that offered higher returns to the
investors for holding higher-risk stocks. Further, the analyses showed, some banks yielded
low returns with high-risk stocks and there was evidence of banks achieving higher returns
despite taking high risks. So, the research review of various studies sheds light on several
combinations of risk and return relationships from the different financial markets around
the world. Subramanyam and Kalyan (2018) in their study regarding the risk and return
analysis of selected stocks in India, stated that risk and return study of stocks provides
information related to stocks performance in the market, and through their analysis, they
had found investment opportunities for the investor with various combination of risks and
returns.
The major attention in the previous study was on the risk and return aspects of the chosen
commercial banks keeping in mind the investor's perspective. This study further adds
value to the previous studies and has tried to understand the risk per unit of return, the
degree of relationship between risk and return of selected commercial banks, identify the
systematic and unsystematic risks of the selected banks, and will also shed light on the
stocks which are over or under priced among the selected commercial stocks and very few
researches has been done in this field with regards to Nepalese stock market. So, there is
a necessity for alternative perspectives and also to further build on the previously
researched similar topics. Many researchers have taken the time period for the data
analysis below five years, our study analyses data for the last six years. Risk and return
analysis are the most important study for the stakeholder of the company. Thus, the
current evaluation of risk and return will provide the present status of the risk and return of
the common stocks of commercial banks in Nepal
The research study on the topic of “ANALYSIS OF RISK AND RETURN FROM COMMON
STOCK OF COMMERCIAL BANKS IN NEPAL – A CASE STUDY OF EVEREST BANK
LIMITED” has selected Everest bank major focus of the study and risk and return of the
bank will be analyzed with respect to other commercial banks as well. So, the study will
add more information to the previous study related to the risk and return of common stock
of commercial banks in Nepal along with updated information and current scenario of risk
and return of the common stock of commercial banks in Nepal.
Conceptual Framework
The study will be focusing on the risk and return analysis. So, return will be the dependent
variable and risk will be the independent variable. Risks can be further divided into two
categories: Systematic and Unsystematic risk. This research study will focus on the impact
of total risk, systematic, and unsystematic risk on the stock return.
Dependent variable Independent variable
Expected Return Total Risk: Unsystematic and Systematic
Research methodology describes the way to solve the research problems in a systematic
manner. This chapter will show how the study will be conducted and consists of research
design methods for data collection and research variables. The study follows the required
research methodology as described in this this chapter.
3.1. Research design
There are two way through which the research design can be constructed. One is
qualitative and the other way is quantitative. In this study both analytical and descriptive
research design has been followed.
Qualitative research: This research offers a complete analysis and description of
research subject without limiting the scope of the study (Neville, 2007).
Quantitative research: Quantitative research refers to dealing with numbers and or
something that can be quantified or measured in a systematic way. For this study,
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quantitative research will be conducted as the research majorly deals with the risk and
return which requires quantitative data for like financial figures from annual reports. Further
various statistical tools will be used in this study such as standard deviation, mean,
coefficient of variation and variance.
3.2. Research Variables
Data collection is one of the important parts of this study which will provide insights about
the topic being analysed. There are two way to collect the data: Primary and Secondary.
Primary Data: Primary data are collected first hand by the researcher in the related field of
study and indicates the originality of source of data. In case where secondary data cannot
provide enough evidence and basis for the analysis, in such cases primary data is
required. In this study primary data collection is not required as all the data related to risk
and return can be obtained from the secondary sources.
Secondary data: Secondary data refers to the data already collected and made available
to the researchers. After the primary data is utilized, the data loses its primary nature and
becomes secondary data. In this study, secondary data has been used extensively rather
than the primary data as the research objectives can be met by the secondary data. The
source of collection of the primary data will be the audited annual reports published by the
banks, economic bulletin published by the central bank, websites, journal articles, e-books
and other reliable secondary sources.
3.4. Limitation of the study
This chapter represents the presentation and analysis of the data collected for the study of
risk and return of Everest Bank. In order to analyse the risk and return of the selected
bank, Nabil Bank which is one of the leading commercial banks in Nepal has also been
analysed to make a comparative analysis between the selected banks however, the focus
of the study will be risk and return analysis of Everest Bank. The data collected in this
section represents data related to the Market price of the share, Cash and Stock dividend
distributed by the company, Earnings per share, Price to Earnings ratio which are collected
from relevant sources such as the annual reports of the company and various websites
which provides information related to the share price movement. The NEPSE index is
selected as the market index in this study. The collected data will be utilized to calculate
expected rate of return from the stocks and NEPSE Index, calculate the risk in terms of
standard deviation, calculate Systematic and Unsystematic risk of the stocks and calculate
the market sensitivity by using Beta Coefficient. Various charts and bar graphs are used in
the study to present the data in a systematic way.
4.1. Analysis of Market price per share, Earnings per share, Dividend and
P/E ratio of Everest Bank Limited
Dividend Earnings
Annual Market Price Cash Dividend on Dividend P/E
on share Per
Year (Closing) Dividend share value (Total) ratio
(%) share
2014/15 2120 5 30 1015.5 1020.5 78.04 27.17
2015/16 3385 0 70 947.1 947.1 40.33 83.94
2016/17 1353 0 33 218.79 218.79 32.48 41.66
2017/18 663 20 0 0 20 32.78 20.23
2018/19 666 20 5 33.75 53.75 38.05 17.5
2019/20 675 5.53 5 33.75 39.28 29.71 22.72
Note: Stock dividend per share = Dividend on share (%) x Market Price share of next year
as there is no proper model for the valuation of the stock dividend. Stock dividend per
share (2019/20) = Dividend on share (%) x Market Price share of 2019/20
For Nabil Bank (Table 4.2)
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Dividend
Annual Market Price Cash Dividend on Dividend Earnings
on share P/E ratio
Year (Closing) Dividend share value (Total) Per share
(%)
2014/15 1910 6.84 36.84 863.5296 870.3696 57.24 33.37
3500 3385
3000
2500 2344
2120
2000 1910
1523
1500 1353
1000 921
800
663 666 675 765
500
0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Figure 4.1
The above figure indicates the graphical representation of the share price movement over
the years which shows declining trend.
As per the analysis of Table 4.3, the annual return of Everest Bank from the financial year
2014/15 to 2015/16 has shown positive trend and the highest annual return was in the
year 2015/16 but the financial year 2016/17 and 2017/18 has been tough year for the bank
as there was negative return from these two financial year. The average return for the past
six years which is represented by Expected return in terms of ratio is 0.3643 while the total
risk measured by the standard deviation is 0.5742. Coefficient of variation measures the
per unit risk and as per the above analysis the to get one unit of return 9.457335443 risk
must be taken.
1 1.04
0.8
0.6
0.4
0.2 0.19
0.09 0.07
0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
-0.2
-0.4
-0.54 -0.5
-0.6
-0.8
Everest Bank
Figure 4.2
As per the analysis of figure 4.2, which is the line graph representing the ratio of annual
return for the Everest Bank indicates that the common stock of Everest Bank gave positive
return from 2014/15 to 2015/16 and negative return from 2016/17 to 2017/18. The annual
return in last two years have stabilized and is positive. The highest return in terms of ratio
achieved during the selected period was 1.043 and the lowest return was found to be –
0.5357 which was in 2016/17.
For Nabil Bank (Table 4.4)
(Annual (Annual Return –
Market
Annual Dividend Annual Return = Return – Expected Return)2
Price
Year (Total) ((P(t) – P(t-1) Expected
(Closing)
+D(1))/P(t-1) Return)
2014/15 1910 870.3696 0.096792742 -0.0374 0.0014
2015/16 2344 700.35 0.593900524 0.4597 0.2114
2016/17 1523 460.08 -0.153976109 -0.2881 0.083
2017/18 921 294 -0.202232436 -0.3364 0.1132
2018/19 800 282.1 0.174918567 0.0407 0.0017
2019/20 765 271.499 0.29562375 0.1615 0.0261
0.805027037 0.4367
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0.6 0.59
0.5
0.4
0.3 0.3
0.2
0.17
0.1 0.1
0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
-0.1
-0.15
-0.2 -0.2
-0.3
Nabil Bank
Figure 4.3
As per the line graph, which indicates the annual return for Nabil Bank, the highest return
was achieved in 2015/16 thereafter the return from the common stock of Nabil Bank
started declining and reached negative for the financial year 2016/17 and 2017/18.Further
in the financial year 2018/19 and 2019/20, the return from the common stock saw positive
growth and has been stable.
Table 4.5
Banks Expected Standard Coefficient Comments
Return Deviation of Variation
Risk Return Risk per
unit of
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return
Everest 0.06072135 0.574262242 9.45733544 High Low High
Bank 7 3
Nabil 0.13417117 0.295523858 2.20258831 Low High Low
Bank 3 6
As per the table 4.5, the return for Nabil Bank is higher than that of Nabil Bank. The risk
represented by the standard deviation is higher for the Everest bank while Nabil bank has
low risk in comparison to the Everest bank. Everest bank has high risk per unit of return
while the per unit risk for the investment in Nabil bank is lower in comparison to the
Everest Bank. Thus, the analysis indicates that Everest bank has high total risk as well as
high risk per unit of return but low return while Nabil Bank has low risk, high return which
makes it better option for investment than the Everest Bank.
Figure 4.5
As explained in the 4.5, the above bar graph shows the graphical representation of risk,
return and Coefficient of Variation from both commercial banks which clearly shows that
Everest bank has higher risk, lower return while Nabil Bank has low risk and higher return.
The stock market in Nepal is represented by ‘The Nepal Stock Exchange Limited’
popularly known as NEPSE. The overall movement in the market is represented by the
NEPSE Index. The market return, risk and coefficient of variation is shown by the table
below:
(Table 4.5)
Annual Index Annual Return = ((P(t) (Annual (Annual
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The data represented by the above tables indicates the annual return, Expected Return,
Standard deviation and Coefficient of Variation of NEPSE Index which the market index.
The annual return from the market has not been good in 2014/15, 2016/17 and 2017/18,
where the market return has been negative while in 2018/19 and 2019/20, the market
return has shown positive movement. The Expected return of the market is 0.087149985
while the risk in the market represented by the standard deviation is 0.36025234. The
coefficient of variation for the index is 4.133705146 which represents the risk per unit of
return.
Annual Return (In Ratio) of Market, Everest bank and Nabil Bank
1.2
0.8
0.6
0.4
0.2
0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
-0.2
-0.4
-0.6
-0.8
Figure 4.6
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The line graphs above represent the annual return of market and both the commercial
banks. As per the line graphs, for the year 2014/15 and 2015/16, Everest bank has
provided better return than market, while for the year 2016/17 and 2017/18, Everest bank
has performed poorly with respect to the market return. Nabil bank has performed better in
2014/15 in comparison to the market while in 2015/16, Nabil bank return was slightly lower
than the market return while from 2017/18 to 2019/20 Nabil bank has outperformed the
market with respect to the return.
Table 4.6
Expected Standard Coefficient of Return Risk C.V
Return Deviation Variation
(C.V)
Everest 0.060721357 0.574262242 9.457335443 Lower Higher Higher
Bank than than than
market marke market
t
Nabil 0.134171173 0.295523858 2.202588316 Higher Lower Lower
Bank than than than
market marke market
t
Market 0.087149985 0.36025234 4.133705146
As per the Table 4.6, which indicates the comparison of both banks with the market with
respect to expected return, standard deviation and coefficient of variation. From the
analysis of the above table, Everest banks has lower return, higher risk and higher
coefficient of variation in comparison to the market while Nabil bank has higher return,
lower risk and lower coefficient of variation in comparison to the overall market. So,
Everest Bank has underperformed and Nabil Bank has outperformed the market with
respect to total risk, return and coefficient of variation.
The beta Coefficient measures the sensitivity of the stock in relation to the market. If the
beta coefficient is high, it represents greater sensitivity of the stock in relation to the market
movement and vice-versa.
For Everest Bank (Table 4.7)
A B
Annual Return of market Annual Return of stock -
Annual Year
- Mean of Market return Mean of the stock return A*B
2014/15 -0.159420304 0.132931247 -0.02119194
2015/16 0.700299429 0.982722039 0.688199683
2016/17 -0.166002239 -0.596381623 0.099000684
2017/18 -0.321128009 -0.555917218 0.17852059
-
2018/19
-0.048671315 0.02487442 0.001210671
2019/20 -0.005077563 0.011771135 -5.97687E-05
0.943258578
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A B
Annual Return of
Annual Year Annual Return of market - stock - Mean of the A*B
Mean of Market return stock return
2014/15 -0.159420304 -0.037378431 0.006
2015/16 0.700299429 0.459729351 0.3219
2016/17 -0.166002239 -0.288147282 0.0478
2017/18 -0.321128009 -0.336403609 0.108
2018/19 -0.048671315 0.040747394 -0.002
-
2019/20
-0.005077563 0.161452577 0.0008
0.481
The above table indicates the beta coefficient of Everest and Nabil bank. From the
comparison of beta coefficient of both the banks, it can be observed that the Everest Bank
is riskier investment than the Nabil Bank, since the beta coefficient of Everest is higher
than Nabil Bank and is greater than one.
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Systematic Risk = Beta Coefficient of the stock * Standard deviation of the market
Unsystematic Risk = Total Risk represented by the standard deviation of the stock –
Systematic Risk
For Everest Bank
Systematic Risk = 1.453607441 x 0.36025234 = 0.5237
Unsystematic risk = 0.5743 - 0.5237 = 0.0506
Percentage of Systematic Risk = Systematic Risk/Total Risk = 0.5237/0.5743 = 91.19%
Percentage of Unsystematic Risk = 8.81%
For Nabil Bank
Systematic Risk = 0.741191713 x 0.36025234 = 0.2670
Unsystematic risk = 0.2955 - 0.2670 = 0.0285
Percentage of Systematic Risk = Systematic Risk/Total Risk = 0.2670/0.2955 = 90.36%
Percentage of Unsystematic Risk = 9.64%
Table 4.11
Risk free Market Beta Required Expected Comment on the
rate of return Coefficient rate of rate of price
return return return
Everest 0.0386 0.0871 1.4536 0.109 0.0607 Over-Priced
Bank
Nabil 0.0386 0.0871 0.7411 0.07454 0.13417 Under-Priced
Bank
As per the table above, if the required rate of return is higher than the expected rate of
return, then the stock is overpriced and Vice-versa. In this case Everest bank is over
priced and Nabil bank is Under-Priced since Everest Bank’s required rate of return is
higher than its expected rate of return and Nabil bank’s required rate of return is lower than
expected rate of return.
The Nepalese stock market is moving towards the liberalization; however, the investors
lack vital information as well knowledge for analysing the stock market. The findings of this
study are as follows:
The income earned from the stock is the return from the stock which can be
represented in percentage. The expected return on the stock of Everest bank is
6.07% and expected return of Nabil bank is 13.42% which is analysed in this study
in order to provide a comparative study. The expected return for the market i.e.,
NEPSE index is 8.71%
In this study, Standard Deviation measures the total risk of the stocks of selected
banks. As per the result, the standard deviation of Everest Bank is 0.574262242
while the Standard deviation of Nabil bank is 0.295523858. This shows that Everest
bank which is the focus of the study has higher risk while comparing it to another
leading commercial bank like Nabil Bank Limited. When it comes to investment
decision, Coefficient of variation is more rational approach to measure the risk as it
defines the risk in terms of per unit of return. The Coefficient of variation for Everest
bank is 9.457335443 and for Nabil Bank is 2.202588316. So, Coefficient of variation
is high for the Everest bank which makes it riskier.
Beta coefficient is the measurement of market sensitivity i.e., it measures stock
volatility with respect to market movement. So, if the beta is high or greater than 1,
then it can be said that the stock is highly volatile in relation to the market
movement. The beta coefficient of Everest Bank is greater than 1 which is
1.453607441 and the beta coefficient for Nabil bank is 0.741191713, thus, it can be
said that Everest bank is more volatile stock than Nabil Bank. So, the Everest Bank
is riskier investment.
Systematic and Unsystematic risks are the two risks which are also analysed in this
study. The systematic risk is related to the market risk and cannot be diversified
while unsystematic risk can be diversified. The proportion of systematic risk in
Everest Bank is 91.19% and unsystematic risk is 8.81% while in case of Nabil bank
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the systematic proportion is 90.36% and Unsystematic risk is 9.64%. From this
analysis it can be said that Everest bank has high systematic risk than Nabil bank
and such risks cannot be diversified so, Everest bank can be considered riskier.
While unsystematic risk is higher in Nabil bank and lower in Everest bank but such
risk can be diversified by using efficient internal control.
In this study, the comparison between required rate of return and expected rate of
return as per the CAPM model is used to derive whether the stock under priced or
over-priced. As per the analysis, the stock of Everest Bank Limited is overpriced
since Everest Bank’s required rate of return is higher than its expected rate of return
and Nabil bank’s required rate of return is lower than expected rate of return.
The investors in Nepal lack knowledge related to analyzing the securities due to lack of
information and understanding of stock return and risk. This study is an attempt to provide
an analysis of the risk which the investor is willing to take and return that the investor is
expecting. The study relates to the risk and return analysis of the stock of Everest bank
with comparison with Nabil Bank and the overall market. The study has been done using
the financial information from 2014/15 to 2019/20 by using the secondary data collection
method. As per the study conduct the expected rate of return of Everest bank is 6.07%
and expected return of Nabil bank is 13.42% while the market has provided expected rate
of return of 8.71%. Thus, Everest bank has underperformed in comparison to the market
and the Nabil bank. Further, the study sheds light on the risk which is higher in the Everest
bank and lower in Nabil bank since the standard deviation is higher in case of Everest
bank. So, from the perspective of risk and return analysis, Everest Bank has high risk and
low return and even the risk per unit of return represented by the coefficient of variation is
higher. So, investing in the Everest Bank is not viable from the investment perspective as it
has high risk but low return. Also, the proportion of systematic risk in Everest Bank is
higher and such risk cannot be diversified which makes Everest bank riskier investment
option. The study has also identified whether the stock of Everest bank is over-priced or
under-priced. The stock of Everest bank is over-priced as per the CAPM model since its
required rate of return is higher than its expected rate of return. In case of Everest Bank
there is no risk and return trade-off as high risk has not resulted in high return in this case.
The study has also analysed the market price per share and Earnings per share of Everest
and Nabil Bank and the results suggests that when the Earnings per share has declined, it
has impacted the market price per share as well in both the banks. Thus, showing the
positive relation between earnings per share and market price per share.
Recommendations
The study shows the significance of the risk and return of common stocks with
reference to selected commercial banks. The investors should consider the risk and
the return factor while making any investment and coefficient of variation can be
used as more efficient way to measure the risk of stocks as it indicates risk per unit
of return. On the basis of coefficient of variation Everest Bank is more risky
investment with low return but Nabil bank is less risky with high return. So, if an
investor wants to invest in any of these banks, he/she should consider Nabil Bank.
6BU013 Independent Project 2040721
Investor should also consider the Beta coefficient while considering the investment.
The investor should invest in stocks with low beta as such stocks are less risky
since they are less volatile in relation to the market. In the study Everest bank has
high beta, so it is more volatile and riskier.
The investors should also consider the pricing of the stock whether the stock is
over-priced or under-priced. If the required rate of return is higher than the expected
rate of return, the stock can be said to be overpriced and vice versa. In this study,
Everest bank is overpriced and Nabil bank is under-priced. So, Investors should be
avoiding Everest bank for investment.
The earnings per share is another factor for analyzing the stock returns as it
represents the income earned per share. Everest Bank has lower earnings per
share in comparison to Nabil Bank. So, it is recommended for investors to invest in
stocks with higher earnings per share.
The company should provide and communicate the financial information on regular
intervals without manipulating the facts so the risk and return analysis can be more
accurate.
The current Nepalese stock market is highly focused on the banking and financial
stocks which requires amendment so that various stocks from other industry should
also be promoted so that investor can diversify the risk.
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6BU013 Independent Project 2040721
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https://www.sharesansar.com/company/ebl
http://nepalstockinfo.com/nepse-index
Appendices
0.555917218
2018/19 666 53.75 0.085595777 0.02487442 0.000618737
2019/20 675 39.28 0.072492492 0.011771135 0.00013856
0.364328142 1.648885613
A B
Annual Return of market Annual Return of stock -
Annual Year
- Mean of Market return Mean of the stock return A*B
2014/15 -0.159420304 0.132931247 -0.02119194
2015/16 0.700299429 0.982722039 0.688199683
2016/17 -0.166002239 -0.596381623 0.099000684
2017/18 -0.321128009 -0.555917218 0.17852059
-
2018/19
-0.048671315 0.02487442 0.001210671
2019/20 -0.005077563 0.011771135 -5.97687E-05
0.943258578
n=6
Market Variance = 0.129781749
Covariance Between market return and Stock return = (A x B)/n-1 = 0.188651716
Beta Coefficient = Covariance/ Market Variance = 1.453607441
For Nabil Bank (Table 4.8)
A B
Annual Return of
Annual Year Annual Return of market - stock - Mean of the A*B
Mean of Market return stock return
2014/15 -0.159420304 -0.037378431 0.006
2015/16 0.700299429 0.459729351 0.3219
2016/17 -0.166002239 -0.288147282 0.0478
2017/18 -0.321128009 -0.336403609 0.108
2018/19 -0.048671315 0.040747394 -0.002
-
2019/20
-0.005077563 0.161452577 0.0008
0.481
n=6
Covariance = (A x B)/n-1
Correlation = Covariance / Standard deviation of Nabil bank x Standard deviation of
Everest Bank
Covariance 0.188652
Correlation 0.911893
l l
Return Return
– –
Expect Expect
ed ed
Return) Return)
- - 0.0059588
2014/15 0.03738 0.15942 81
0.45972 0.70029 0.3219482
2015/16 9 9 02
- 0.0478330
2016/17 0.28815 -0.166 94
- 0.1080286
2017/18 -0.3364 0.32113 21
-
0.04074 - 0.0019832
2018/19 7 0.04867 29
-
0.16145 - 0.0008197
2019/20 3 0.00508 86
0.4809657
83
Covarian 0.09619
ce 3
Correlati 0.90353
on 5
Form 2
Ethics proposal form for (Level Six) Undergraduate written projects, Independent Study,
Business and community link, and Master’s dissertations.
2019/20
You should read the University Ethics Guidance before filling in this form. This is available
from: https://www.wlv.ac.uk/research/research-policies-procedures--guidelines/ethics-
guidance/. Once completed fully, please submit this form to your supervisor for the project
you are undertaking. Once the supervisor has approved and signed it, you must append a
copy to your project placed as appendix A. Please note that this permission is only
concerned with ethical issues and does not indicate anything about the intellectual merit of
your project.
If this is a group project, please list ALL other students involved. (Full names and student
numbers):
4. Subject to which the study will contribute: Case Study of Amazon India: Customer
Satisfaction Level in Supply of Food Products.
Category 0
Research that does not involve human subjects or raise any
ethical concerns.
Category A
Research that involves human subjects that are considered
not to cause any physical or psychological harm.
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Category B
(Note: Undergraduate and Taught Masters students are not
normally permitted to
undertake Category B research).
Making video/DVD
Making audio recording
Observation of human subjects √
Participant observation √
Telephone and/or Email contact with individuals or organizations
Interviews (structured/ semi-structured/un-structured)
Questionnaires (including on-line questionnaires) √
Access to confidential information
Contact with minors (anyone under the age of 18) √
Contact with other vulnerable people (e.g. victims of crime, the
recently bereaved)
Research about a controversial issue √
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Other: please specify (e.g. will your finished project be accessible to the public outside the
university?)
Expand, as necessary.
12. Methodology.
This should include an indication of:
Your objective in gathering primary data from participants.
The participants are identified through questionnaire method.
The number of research participants were 50.
A sample of questions if conducting either interviews or questionnaires. (sample
questions are in appendix)
Expand, as necessary.
Expand, as necessary.
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