RAM LAKHAN SINGH YADAV

COLLEGE RANCHI

Project Report On Goods And ServiceTax (GST).

Submitted in the partial fulfillment of commerce
programme under Ranchi University, Ranchi.

Under The Guidance And Supervision Of Mr.

Gautam Prasad Sahu & Mr. Prince Kumar.

Post Graduate Department of Commerce and

Business Management, RLSY College.
Submitted By:
Name: Khusboo Lakra
M.Com Sem IV 2019-2021
Exam Roll No:19MC8101954
Class Roll No: 13
 CERTIFICATE

This is to certify that the project work titled " GST (Goods and Service
Tax)" is a confide work carried out by Khusboo Lakra Student of
M.Com, Session 2019-2021, bearing class roll no: 13 & university
roll no: 19MC8101954 of RLSY College, Ranchi.

This Project has been submitted in the partial fulfillment for the award
of Masters of Commerce under Ranchi University, Ranchi.

The work done by her is appreciable and I wish her all the success in her
life.

Internal Guide HOD

External

Guide Deptt. of Commerce Deptt. of Commerce

DECLARATION
I Undersigned Khusboo Lakra student of Ram Lakhan Singh Yadav
College, hereby declare that I have completed my project, Titled
“GOODS AND SERVICE TAX (GST).”

The information submitted herein is true and original to the best of my

knowledge.

Khusboo Lakra, PLACE: Ranchi

 ACKNOWLEDGEMENT

I wish to express my sincere gratitude to my institute to provide this opportunity to

learn the element of GOODS AND SERVICE TAX.

One person is seclusion is hardly ever able to complete any project or training.
There is always discussion with professional about conceptual matters, which
enhance the idea and the knowledge of trainee.

Thereby, I would like to acknowledge the contribution and support that each
person’s extended to me during my training period.

I would also like to express my special thanks to my guide Mr. Gautam Prasad

Sahu & Mr. Prince Kumar who provide me valuable insight about aspect of
Goods and Service Tax with the external environment with which it associated.

Khusboo Lakra
Date:
 CONTENTS
Introduction
1.1 Introduction 2
1.
2 Need of the study 3
1.
3 Scope of the study 4
1.
4 Objectives of the study 5
1.
5 Research methodology 6
1.
6 Limitations of the study 7
Chapter 2 2.1 Industry profile 9
2. 2
2 Company profile 2
Chapter 3 Literature Review
3. 3
1 Risk Analysis 2
3.
2 Types of risks 34
3.
3 Measurement of risk 39
3.
4 Return Analysis 42
3.
5 Risk and return Trade off 45
3.
6 Risk-return relationship 46
Data Analysis &
Chapter 4 Interpretation 49
Chapter 5 Findings & suggestion 67
Chapter 6 Bibliography 71
 1.1 INTRODUCTION

The risk/return relationship is a fundamental concept in

not only financial analysis, but in every aspect of life. If
decisions are to lead to benefit maximization, it is
necessary that individuals/institutions consider the
combined influence on expected (future) return or benefit
as well as on risk/cost. Return expresses the amount which
an investor actually earned on an investment during a
certain period. Return includes the interest, dividend and
capital gains; while risk represents the uncertainty
associated with a particular task. In financial terms, risk is
the chance or probability that a certain investment may or
may not deliver the actual/expected returns.
The risk and return trade off says that the potential return
rises with an increase in risk. It is important for an
investor to decide on a balance between the desire for
the lowest possible risk and highest possible return.
 1.2 NEED FOR THE STUDY

In the finance field, it is a common knowledge that

money or finance is scarce and that investors try to
maximize their returns. But when the return is higher, the
risk is also higher. Return and risk go together and they
have a tradeoff. The art of investment is to see that return
is maximized with minimum risk.
In the above discussion we concentrated on the word
“investment” and to invest we need to analyze securities.
Combination of securities with different risk-return
characteristics will constitute the portfolio of the
investor.

1.3 SCOPE OF THE STUDY

The study covers all the information related to the

investor risk-return relationship of securities. It is
confined to five years data of ICICI and HDFC securities.
It also includes the calculation of individual standard
deviations which helps in allocating the funds available
for investment based on risky portfolios.
 1.4 OBJECTIVES OF THE STUDY

1. To study the fluctuations in share prices of selected

companies.
2. To study the risk involved in the securities of selected
companies.
3. To make comparative study of risk and return of
ICICI& HDFC.
4. To study the systematic risk involved in the selected
companies securities.
5. To offer some suggestions to the investors.

1.5 METHODOLOGY OF THE STUDY

The data used in this project is of secondary nature. The

data is collected from secondary sources such as various
websites, journals, newspapers, books, etc., the analysis
used in this project has been done using selective
technical tools. In Equity market, risk is analyzed and
trading decisions are taken on basis of technical analysis.
It is collection of share prices of selected companies for a
period of five years.
This is the study of Risk-Return analysis for a period of five
years (2007-2012).
1.6 LIMITATIONS
This study has been conducted purely to understand
Risk-return characteristics for investors. The study is
restricted to only two selected companies. Very few
and randomly selected scripts/companies are analyzed
from BSE listings The study is limited to banking
companies only.

LITERATURE REVIEW

3.1 Risk Analysis

3.2 Types of risks
3.3 Measurement of risk
3.4 Return Analysis
3.5 Risk and return Trade off
3.6 Risk-return relationship

Risk Analysis
Risk in investment exists because of the inability to make
perfect or accurate forecasts. Risk in investment is
defined as the variability that is likely to occur in future
cash flows from an investment. The greater variability of
these cash flows indicates greater risk.
Variance or standard deviation measures the deviation
about expected cash flows of each of the possible cash
flows and is known as the absolute measure of risk;
while co-efficient of variation is a relative measure of
risk.

For carrying out risk analysis, following methods are used-

Payback [How long will it take to recover the investment]
Certainty equivalent [The amount that will certainly come to
you]
Risk adjusted discount rate [Present value i.e. PV of future
inflows with discount rate]

However in practice, sensitivity analysis and conservative

forecast techniques being simpler and easier to handle, are
used for risk analysis. Sensitivity analysis [a variation of
break even analysis] allows estimating the impact of
change in the behavior of critical variables on the
investment cash flows. Conservative forecasts include
using short payback or higher discount rates for
discounting cash flows.

Types of risks:

Investment Risks:
Investment risk is related to the probability of earning
a low or negative actual return as compared to the
return that is estimated. There are 2 types of
investments risks:
Stand-alone risk:
This risk is associated with a single asset, meaning that the
risk will cease to exist if that
particular asset is not held. The impact of stand alone risk can
be mitigated by diversifying
the portfolio.
Stand-alone risk = Market risk + Firm specific risk
Where,
Market risk is a portion of the security's stand-alone
risk that cannot be eliminated trough diversification
and it is measured by beta

Firm risk is a portion of a security's stand-alone risk that

can be eliminated through proper diversification

Portfolio risk
This is the risk involved in a certain combination of assets
in a portfolio which fails to deliver the overall objective of
the portfolio. Risk can be minimized but cannot be
eliminated, whether the portfolio is balanced or not. A
balanced portfolio reduces risk while a non-balanced
portfolio increases risk.
Sources of risks:
Inflation
Business cycle
Interest rates
Management
Business risk
Financial risk

Types of Risk

Unfortunately, the concept of risk is not a simple concept

in finance. There are many different types of risk
identified and some types are relatively more or relatively
less important in different situations and applications. In
some theoretical models of economic or financial
processes, for example, some types of risks or even all
risk may be entirely eliminated. For the practitioner
operating in the real world, however, risk can never be
entirely eliminated. It is ever-present and must be
identified and dealt with.

In the study of finance, there are a number of different

types of risk has been identified. It is important to
remember, however, that all types of risks exhibit the
same positive risk-return relationship.
 Systematic Risk Vs Unsystematic Risk
There is one more way to classify financial risk – is risk
will impact whole economy or particular company or a
sector.

Systematic Risk – it is also known as market risk or economic

risk or non diversifiable risk
&it impacts full economy or share market. Let’s say if
interest rate will increase whole economy will slow down
& there is no way to hide from this impact. As such there
is no way to reduce systematic risk other than investing
your money in some other country. Beta can be helpful in
understanding this.

Unsystematic Risk – it affects a small part of economy or

sometime even single company. Bad management or low
demand in some particular sector will impact a single
company or a single sector – such risks can be reduced by
diversifying once investments. So this is also called
Diversifiable Risk.
 Systematic risk

1.Interest Rate Risk

The uncertainty associated with the effects of changes in

market interest rates. There are two types of interest rate
risk identified; price risk and reinvestment rate risk. The
price risk is sometimes referred to as maturity risk since
the greater the maturity of an investment, the greater the
change in price for a given change in interest rates. Both
types of interest rate risks are important in investments,
corporate financial planning, and banking.

Price Risk: The uncertainty associated with

potential changes in the price of an asset caused by
changes in interest rate levels and rates of return in
the economy. This risk occurs because changes in
interest rates affect changes in discount rates which,
in turn, affect the present value of future cash flows.
The relationship is an inverse relationship. If interest
rates (and discount rates) rise, prices fall. The
reverse is also true.
 Since interest rates directly affect discount rates
and present values of future cash flows represent
underlying economic value, we have the following
relationships.

Reinvestment Rate Risk: The uncertainty

associated with the impact that changing interest
rates have on available rates of return when
reinvesting cash flows received from an earlier
investment. It is a direct or positive relationship.

2.Market risk

This is the risk that the value of a portfolio, either an

investment portfolio or a trading portfolio, will decrease
due to the change in market risk factors. The four
standard market risk factors are stock prices, interest
rates, foreign exchange rates, and commodity prices:

Equity risk is the risk that stock prices in general (not

related to a particular company or industry) or the
implied volatility will change.
Interest rate risk is the risk that interest rates or the implied
volatility will change.
Currency risk is the risk that foreign exchange rates or
the implied volatility will change, which affects, for
example, the value of an asset held in that currency.
Commodity risk is the risk that commodity prices (e.g.
corn, copper, crude oil) or implied volatility will
change.

3.Inflation Risk (Purchasing Power Risk)

Inflation risk is the loss of purchasing power due to the

effects of inflation. When inflation is present, the
currency loses its value due to the rising price level in the
economy. The higher the inflation rate, the faster the
money loses its value.
 Unsystematic risk

1. Business risk

The uncertainty associated with a business firm's

operating environment and reflected in the variability of
earnings before interest and taxes (EBIT). Since this
earnings measure has not had financing expenses
removed, it reflects the risk associated with business
operations rather than methods of debt financing. This risk
is often discussed in General Business Management
courses.

2. Financial risk

The uncertainty brought about by the choice of a firm’s

financing methods and reflected in the variability of
earnings before taxes (EBT), a measure of earnings that
has been adjusted for and is influenced by the cost of
debt financing. This risk is often discussed within the
context of the Capital Structure topics.
 Total Risk

While there are many different types of specific risk, we

said earlier that in the most general sense, risk is the
possibility of experiencing an outcome that is different
from what is expected. If we focus on this definition of
risk, we can define what is referred to as total risk. In
financial terms, this total risk reflects the variability of
returns from some type of financial investment.

Measures of Total Risk

The standard deviation is often referred to as a "measure

of total risk" because it captures the variation of possible
outcomes about the expected value (or mean). In financial
asset pricing theory the Capital Asset Pricing Model
(CAPM) separates this "total risk" into two different
types of risk (systematic risk and unsystematic risk).
Another related measure of total risk is the "coefficient of
variation" which is calculated as the standard deviation
divided by the expected value. It is often referred to as a
scaled measure of total risk or a relative measure of total
risk. The following notes will discuss these concepts in
more detail.
 Measurement of risks

Statistical measures that are historical predictors of

investment risk and volatility and major components in
modern portfolio theory (MPT) . MPT is a standard
financial and academic methodology for assessing the
performance of a stock or a stock fund compared to its
benchmark index.
There are five principal risk measures:

Alpha: Measures risk relative to the market or benchmark

index
Beta: Measures volatility or systemic risk compared to
the market or the benchmark index R-Squared:
Measures the percentage of an investment's movement
that are attributable to movements in its benchmark
index
Standard Deviation: Measures how much return on
an investment is deviating from the expected normal or
average returns
Sharpe Ratio: An indicator of whether an
investment's return is due to smart investing decisions
or a result of excess risk.
Each risk measure is unique in how it measures risk.
When comparing two or more potential investments, an
investor should always compare the same risk measures
to each different potential investment to get a relative
performance.

Definition of 'Beta'
A measure of the volatility, or systematic risk of a
security or a portfolio in comparison to the market as a
whole. Beta is used in the capital asset pricing model
(CAPM), a model that calculates the expected return of an
asset based on its beta and expected market returns. Also
known as "beta coefficient".

Beta is calculated using regression analysis, and you can

think of beta as the tendency of a security's returns to
respond to swings in the market. A beta of 1 indicates
that the security's price will move with the market. If
beta is less than 1 means that the security will be less
volatile than the market. A beta of greater than 1
indicates that the security's price will be more volatile
than the market. For example, if a stock's beta is 1.2, it's
theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1.
Conversely, most high-tech Nasdaq-based stocks have a
beta of greater than 1, offering the possibility of a higher
rate of return, but also posing more risk.

Definition of 'Alpha'
1.A measure of performance on a risk-adjusted basis.
Alpha takes the volatility (price risk) of a mutual fund
and compares its risk-adjusted performance to a
benchmark index. The excess return of the fund relative
to the return of the benchmark index is a fund's alpha.
2.The abnormal rate of return on a security or portfolio in
excess of what would be predicted by an equilibrium
model like the capital asset pricing model (CAPM).
3.Alpha is one of five technical risk ratios; the others are
beta, standard deviation, R-squared, and the Sharpe ratio.
These are all statistical measurements used in modern
portfolio theory (MPT). All of these indicators are
intended to help investors determine the risk-reward
profile of a mutual fund. Simply stated, alpha is often
considered to represent the value that a portfolio manager
adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has
outperformed its benchmark index by 1%.
Correspondingly, a similar negative alpha would
indicate an underperformance of 1%.
4.If a CAPM analysis estimates that a portfolio should
earn 10% based on the risk of the portfolio but the
portfolio actually earns 15%, the portfolio's alpha would
be 5%. This 5% is the excess return over what was
predicted in the CAPM model.

Definition of 'Standard Deviation'

1.A measure of the dispersion of a set of data from its

mean. The more spread apart the data, the higher the
deviation. Standard deviation is calculated as the square
root of variance.

2.In finance, standard deviation is applied to the annual

rate of return of an investment to measure the
investment's volatility. Standard deviation is also known
as historical volatility and is used by investors as a gauge
for the amount of expected volatility.

Standard deviation is a statistical measurement that sheds

light on historical volatility. For example, a volatile stock
will have a high standard deviation while the deviation
of a stable blue chip stock will be lower. A large
dispersion tells us how much the return on the fund is
deviating from the expected normal returns.

Definition of 'R-Squared'

A statistical measure that represents the percentage of a

fund or security's movements that can be explained by
movements in a benchmark index. For fixed-income
securities, the benchmark is the T-bill. For equities, the
benchmark is the S&P 500.

R-squared values range from 0 to 100. An R-squared of 100

means that all movements of
a security are completely explained by movements in the
index. A high R-squared (between 85 and 100) indicates
the fund's performance patterns have been in line with
the index. A fund with a low R-squared (70 or less)
doesn't act much like the index.

A higher R-squared value will indicate a more useful

beta figure. For example, if a fund has an R-squared
value of close to 100 but has a beta below 1, it is most
likely offering higher risk-adjusted returns. A low R-
squared means you should ignore the beta.
When most people think of investments they think of
stocks or mutual funds. An investment is more than this.
An investment requires one to set aside an amount today
with the expectation of receiving a larger sum in the
future.

Return Analysis

An investment is the current commitment of funds done

in the expectation of earning greater amount in future.
Returns are subject to uncertainty or variance Longer the
period of investment, greater will be the returns sought.
An investor will also like to ensure that the returns are
greater than the rate of inflation.
An investor will look forward to getting compensated by way
of an expected return based on
3 factors -
Risk involved
Duration of investment [Time value of money]
Expected price levels [Inflation]

The basic rate or time value of money is the real risk free
rate [RRFR] which is free of any risk premium and
inflation. This rate generally remains stable; but in the
long run there could be gradual changes in the RRFR
depending upon factors such as consumption trends,
economic growth and openness of the economy.
If we include the component of inflation into the RRFR
without the risk premium, such a return will be known
as nominal risk free rate [NRFR] NRFR = ( 1 +
RRFR ) * ( 1 + expected rate of inflation ) - 1
Third component is the risk premium that represents
all kinds of uncertainties and is calculated as
follows -
Expected return = NRFR + Risk premium.

Any investor who lays aside money today expects to get

more in return later. How much is more? Well, the best
way to calculate this is to look at your rate of return. In its
simplest form, you would take the ending value of your
investment, divide it by your initial investment, take the n
root of it (where n= the number of years you held the
investment), and minus one. Confused? Well, let's give an
example.
If I invested $100 for three years and after this period it
was worth $150, my rate of return would be [150/100^
(1/3)]-1=14.47%. Don't worry we'll look at this concept
more when we study present and future values.
Now that you have your rate of return you may be
asking, "How much is enough?" Well, looking at past
market history, equities on average returned 10%
annually, small caps 12%, bonds 5%, and t-bills around
3-4%. We will ignore all this for now and state the
required return more formally.
Firstly, investors should be compensated for the real
interest rate and inflation (note: the real rate plus
inflation=nominal rate). This nominal rate is the rate of
return on US Government bonds. Investors expect at least
this when they buy a stock. The reason? A stock has risk
and government bonds don't. If stock does not outperform
bonds then investors will prefer the bonds. The second
component of required return is inflation which is already
incorporated into our nominal rate.
Lastly we have a premium for risk. Since investors do
not know for sure if their investment will make them
money, they want to be compensated for this additional
risk with additional return.
Return on security (single asset) consists of two parts:

Return = dividend + capital gain rate

R=D1+(P1–P0)P0

WHERE R = RATE OF RETURN IN YEAR 1

D1 = DIVIDEND PER SHARE IN YEAR 1

P0 = PRICE OF SHARE IN THE BEGINNING OF THE YEAR

P1 = PRICE OF SHARE IN THE END OF THE YEAR

Average rate of return

R = 1 [ R1+R2+……+Rn] n

R =1ΣRtnt=1 Where,

R = average rate of return.

Rt = Realised rates of return in periods 1,2, …..t

n = total no. of periods

Expected rate of return:

It is the weighted average of all possible returns multiplied

by their respective probabilities.

E(R) = R1P1 + R2P2 + ………+ RnPn

E(R) = ΣRiPii Where,

Ri is the outcome i,

Pi is the probability of occurrence of i.

n= No of periods
 Risk and return trade off:

Investors make investment with the objective of earning

some tangible benefit. This benefit in financial
terminology is termed as return and is a reward for
taking a specified amount of risk.
Risk is defined as the possibility of the actual return being
different from the expected return on an investment over
the period of investment. Low risk leads to low returns.
For instance, incase of government securities, while the
rate of return is low, the risk of defaulting is also low.
High risks lead to higher potential returns, but may also
lead to higher losses. Long-term returns on stocks are
much higher than the returns on Government securities,
but the risk of losing money is also higher.
Rate of return on an investment cal be calculated
using the following formula-Return = (Amount
received - Amount invested) / Amount invested
He risk and return trade off says that the potential rises
with an increase in risk. An investor must decide a
balance between the desire for the lowest possible risk
and highest possible return.
 Risk-Return relationship

By now you should understand that even with the most

conservative investments you face some element of risk.
However, not investing your money is also risky. For
example, putting your money under the mattress invites
the risk of theft and the loss in purchasing power if prices
of goods and services rise in the economy. When you
recognize the different levels of risk for each type of
investment asset, you can better manage the total risk in
your investment portfolio.

A direct correlation exists between risk and return and is

illustrated in Figure. The greater the risk, the greater is the
potential return. However, investing in securities with the
greatest return and, therefore, the greatest risk can lead to
financial ruin if everything does not go according to plan.

Risk and Return

Understanding the risks pertaining to the different
investments is of little consequence unless you’re aware
of your attitude toward risk. How much risk you can
tolerate depends on many factors, such as the type of
person you are, your investment objectives, the dollar
amount of your total assets, the size of your portfolio, and
the time horizon for your investments.

How nervous are you about your investments? Will you

check the prices of your stocks daily? Can you sleep at
night if your stocks decline in price below their
acquisition prices? Will you call your broker every time a
stock falls by a point or two? If so, you do not tolerate risk
well, and your portfolio should be geared toward
conservative investments that generate income through
capital preservation. The percentage of your portfolio
allocated to stocks may be low to zero depending on your
comfort zone. If you are not bothered when your stocks
decline in price because with a long holding period you
can wait out the decline, your portfolio of investments can
be designed with a higher percentage of stocks. Figure 2
illustrates the continuum of risk tolerance.
A wide range of returns is associated with each type of
security. For example, the many types of common stocks,
such as blue-chip stocks, growth stocks, income stocks,
and speculative stocks, react differently. Income stocks
generally are lower risk and offer returns mainly in the
form of dividends, whereas growth stocks are riskier and
usually offer higher returns in the form of capital gains.
Similarly, a broad range of risks and returns can be found
for the different types of bonds. You should be aware of
this broad range of risks and returns for the different types
of securities so that you can find an acceptable level of
risk for yourself.

Figure 2: Continuum of Risk Tolerance

RISK AND RETURN ON BANKING SECURITIES

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 CONSIDERATIONS

How Assured Can I be Of Getting My Full Investment

Back? Company Fixed Deposits are
unsecured instruments, i.e., there are no assets backing
them up. Therefore, in case the
company/HDFC goes under, chances are that you may not
get your principal sum back. It
depends on the strength of the company and its ability to
pay back your deposit at the time of its maturity. While
investing in an NBFC, always remember to first check out
its credit rating. Also,beware of HDFCs offering
ridiculously high rates of interest.

How Assured Is My Income? Not at all secured. Some

NBFCs have known to default on their interest and
principal payments. You must check out the liquidity
position and its revenue plan before investing in an
HDFC.
Are Their any Risks Unique to Company Fixed
Deposits? If the Company/NBFC goes under,
there is no assurance of your principal amount. Moreover,
there is no guarantee of your receiving the regular-interval
income from the company. Inflation and interest rate
movements are one of the major factors affecting the
decision to invest in a Company/NBFC Fixed Deposit.
Also, you must keep the safety considerations and the
company/NBFC’s credit rating and credibility in mind
before investing in one.

Are Company/NBFC Deposits rated for their credit

Quality? Yes, Company/NBFC Fixed
Deposits are rated by credit rating agencies like CARE,
CRISIL and ICRA. A company rated
lower by credit rating agency is likely to offer a higher
rate of interest and vice-versa. An AAA rating signifies
highest safety, and D or FD means the company is in
default.

DIFFERENT TYPE OF RISK

Forces that contribute to variance in return-price or

dividend-constitute the element of risk .some influence
are external to the organization cannot be controlled other
influence are internal to the organization that are
controllable to a large extent .in an investment decision
those factors which is uncontrollable is called systematic
risk .on the other hand those factors are controllable and
internal to the organization are called unsystematic risk
these are the two broad categories of risk.

1. SYSTEMATIC RISK.

MARKET RISK

This is the most familiar of all risks. Also referred to as

volatility, market risk is the day-to-day fluctuation in a
stock's price. Market risk applies mainly to stocks and
options. As a whole, stocks tend to perform well during a
bull market and poorly during a bear market - volatility is
not so much a cause but an effect of certain market forces.
Volatility is a measure of risk because it refers to the
behaviour, or "temperament", of your investment rather
than the reason for this behaviour. Because market
movement is the reason why people can make money
from stocks, volatility is essential for returns, and the
more unstable the investment the more chance there is
that it will experience a dramatic change in either
direction.

Market risk is caused by investors’ reaction to the

tangible as well as intangible events. expectation of lower
corporate profile in general may cause the larger body of
common stocks to fall in price .investors are expressing
their judgment that too much is being paid for
earning in the light of anticipated events .the basis for the
reaction is a set of real, tangible, events – political, social
or economic.

INTEREST RATE RISK

Interest rate risk is the risk that an investment's value will

change as a result of a change in interest rates. This risk
affects the value of bonds more directly than stocks. the
root cause of interest rate risk lies in the fact that, if the
RBI increase or decrease the interest rate (repo rate) the
interest on government securities rise or fall, the rate of
return demanded on alternative investment vehicle, such
as stocks and bonds issued in the private sector ,rise or
fall .in other words as the cost of money changes for
nearly risk free securities, the cost of money to more risk
prone issues will also change.

INFLATION RISK (PURCHASING POWER RISK)

The loss of purchasing power due to the effects of

inflation. When inflation is present, the currency loses its
value due to the rising price level in the economy. The
higher the inflation rate, the faster the money loses its
value.
LIQUIDITY RISK
The uncertainty associated with the ability to sell an asset
on short notice without loss of value. A highly liquid asset
can be sold for fair value on short notice. This is because
there are many interested buyers and sellers in the market.
An illiquid asset is hard to sell because there few
interested buyers. This type of risk is important in some
project investment decisions but is discussed extensively
in Investment courses.

FOREIGN EXCHANGE RISKS

Uncertainty that is associated with potential changes in

the foreign exchange value of a currency. There are two
major types: translation risk and transaction risks.

TRANSLATION RISKS
Uncertainty associated with the translation of foreign
currency denominated accounting statements into the
home currency. This risk is extensively discussed in
Multinational Financial Management courses.
2. UNSYSTEMATIC RISK

Unsystematic risk are those risk which is firm specific or

peculiar to a firm or industry the different type of
unsystematic risk are discussing below.
BUSINESS RISK

The uncertainty associated with a business firm's

operating environment and reflected in the variability of
earnings before interest and taxes (EBIT). Since this
earnings measure has not had financing expenses
removed, it reflects the risk associated with business
operations rather than methods of debt financing. This
risk is often discussed in General Business Management
courses.
Business risk can be divided into two board categories:
external and internal .internal business risk is largely
associated with the efficiency with which a firm conduct
its operation within the border operating environment
imposed upon it .each firm has it s on internal risk, and
the degree to which it is successful in coping with them is
reflected in operating efficiency.

FINANCIAL RISK
The uncertainty brought about by the choice of a firm’s
financing methods and reflected in the variability of
earnings before taxes (EBT), a measure of earnings that
has been adjusted for and is influenced by the cost of debt
financing. This risk is often discussed within the context
of the Capital Structure topics.
By Engaging in debt financing the firm changes the
characteristics of the earning stream available to the
common stock holders, specifically, the reliance in debt
financing ,called financial leverage ,has at least three
important effect on common stock holders .
1) Increase the variability of their return
2) Effect their expectation concerning to the return
3) Increase the risk of being ruined.
When the investor want to invest his money at a
higher rate of return there is a higher factor of risk.
As we would be exposing our money to the markets
(equity, debt, etc.) and their associated risks. Further, the
higher the risk taken, the higher is the expected return. In
the bank the money is exposed to no risk, so the return is
just at about the inflation rate. In contrast the risk in
equity markets is the highest, and the expected returns
would also be the highest. Before exposing ourselves to
the markets, we can apply common sense and our learning
to reduce this risk to acceptable levels.
There are 5 economic factors that affect equity returns:
1. Unanticipated changes in default risk; 2. Unanticipated
changes in the term structure of interest rates; 3.
Unanticipated changes in the inflation rate; 4.
Unanticipated changes in the long-run growth rate of
profits for the economy; and 5. Residual market risk.
Which can be classified under the 4 types of
investment risk, namely; Business risk, Inflation risk,
Interest rate risk and Market risk.
Statistical techniques can be developed to measure each
of the above risk factors.
When the investor want to invest his money at a
higher rate of return there is a higher factor of
risk. As we would be exposing our money to the markets
(equity, debt, etc.) and their associated risks. Further, the
higher the risk taken, the higher is the expected return. In
the bank the money is exposed to no risk, so the return is
just at about the inflation rate. In contrast the risk in
equity markets is the highest, and the expected returns
would also be the highest. Before exposing ourselves to
the markets, we can apply common sense and our learning
to reduce this risk to acceptable levels.
There are 5 economic factors that affect equity returns:
1. Unanticipated changes in default risk; 2. Unanticipated
changes in the term structure of interest rates; 3.
Unanticipated changes in the inflation rate; 4.
Unanticipated changes in the long-run growth rate of
profits for the economy; and 5. Residual market risk.
Which can be classified under the 4 types of investment
risk, namely; Business risk, Inflation risk, Interest rate
risk and Market risk.Statistical techniques can be
developed to measure each of the above risk factors.The
key insight offered by Dr. Markowitz's work is that risk of
any security, as measured by its standard deviation of
return, is not what is important. Instead, it is the
correlation or covariance of the security's return within a
diversified portfolio that will determine its risk.
Thus, while the expected return of a portfolio is the
market weighted average expected return of the
securities comprising the portfolio, the risk of the
portfolio is not a linear function of the standard
deviation of the risk of the individual security.
By combining securities in a portfolio with characteristics
similar to the market, the efficiency of the market would
be captured. The risk of a security as measured by the
standard deviation of return can be partitioned into 2
components, namely non-diversifiable and diversifiable.
Nondiversifiable risk are factors common to and
affecting all securities. The impact of these factors on a
portfolio cannot be avoided. This type of risk is also
called market or systemic risk. Once an investor is in the
market he cannot avoid it.
Diversifiable risk is the unsystemic risk, which is unique
to an individual security. Like a long strike in a factory,
which would affect its earnings and profitability. This risk
can be avoided by diversifying the portfolio of securities.
By holding a portfolio of 10-12 different stocks, an
investor can diversify away all unsystemic risk. In this
situation of a well-diversified portfolio the only risk is the
non-diversifiable or market risk (which in any case cannot
be avoided when an investor enters the market).
The Sharpe-Lintner-Mossin analysis states that market
risk can be measured by the product of the standard
deviation of the return on the market and the 'beta' of the
security. This beta is estimated using historical data,
measures the sensitivity of the return on the security to
changes in the market as measured by some market index
such as the Nifty or Sensex.
Now, the standard deviation of the market is common to
all securities, thus the beta of the security is a proxy for
relative systemic risk. Given that the investor should be
compensated for the market risk, the beta is a relative
measure of market risk.
Expected return = Risk free rate + beta × (expected
market return − risk free rate).
This is also called the capital asset pricing model or
CAPM and states that the expected return from a security
should equal the risk free rate of return plus a risk
premium.
Prof. Stephen Ross went on to develop the arbitrage
pricing theory or APT. This model allows for more than
one factor to systemically affect the prices of all
securities. Investors in this case would also want to be
compensated for accepting each of these different
systemic risks or factors effecting the market. Here:
Expected return = risk free return + beta1× (risk
premium for factor1) + beta2 × (risk premium for
factor2) + ...+ beta k × (risk premium for factor k)
In this case the investor's expected return is a composite
of the compensation for each of the risks. In both the
models above the expected return is not determined by
unsystemic risk but the systemic risk.
Now, to make it simple for you it would be a good idea to
study the following:
Expected rate of return = [Annual Income + (Ending
price − Beginning price)] ÷ Beginning price
Where: Annual income = Dividend; Ending price =
selling price
and Beginning price = cost or purchase price.
When we talk about diversification, it also implies not to
put all our eggs in one basket. Which means that we
would be fool hardy to deploy all our savings into the
equity market. We must give due consideration to our life,
and look at it from a larger perspective. Then we would
sensibly hold assets from various asset classes in our
portfolio, to reduce or minimize the various risks listed
above.

STOCK MARKET
Stock market is place where the stocks or shares are
purchased and sold .stock exchange is an organized
market where securities are traded .these securities are
issued by the government, semi-government, public sector
undertakings and companies for borrowing funds and
raising resources. securities are defined as any monetary
claims and includes stock ,shares, debentures, bonds
etc .if these securities are marketable as in the case of
government stocks; they are transferable by endorsement
and are like moveable property. They are tradable on the
stock exchange.
Exchanges are located all over the world with the most
famous one being the New York stock exchange. The
NYSE annually traded almost 14 trillion dollars worth of
capital.

Thousands of stocks are listed on this exchange. when

you buy a stock you will need to learn which exchanges
list it other than locating quote in the news paper with
online trading and the automation of order system ,there is
very little reason to determine where the stock trades from
the customers viewpoint.

There are 22 stock exchanges in India, the first being the

Bombay Stock Exchange (BSE), which began formal
trading in 1875, making it one of the oldest in Asia. Over
the last few years, there has been a rapid change in the
Indian securities market, especially in the secondary
market.
Advanced technology and online-based transactions have
modernized the stock exchanges. In terms of the number
of companies listed and total market capitalization, the
Indian equity market is considered large relative to the
country’s stage of economic development. The number of
listed companies increased from 5,968 in March 1990 to
about 20,000 by May 2006 and market Capitalization has
grown almost 11 times during the same period. The debt
market, however, is almost nonexistent.

BOMBAY STOCK EXCHANGE LIMITED (BSE)

Bombay Stock Exchange Limited is the oldest stock

exchange in Asia with a rich heritage. Popularly known as
"BSE", it was established as "The Native Share & Stock
Brokers Association" in 1875. It is the first stock
exchange in the country to obtain permanent

recognition in 1956 from the Government of India under

the Securities Contracts (Regulation) Act, 1956.The
Exchange's pivotal and pre-eminent role in the
development of the Indian capital market is widely
recognized and its index, SENSEX, is tracked worldwide.

Earlier an Association of Persons (AOP), the Exchange is

now a demutualised and corporatized entity incorporated
under the provisions of the Companies Act, 1956,
pursuant to the BSE (Corporatisation and
Demutualization) Scheme, 2005 notified by the Securities
and Exchange Board of India (SEBI).With
demutualization, the trading rights and ownership
rights have been de-linked effectively addressing
concerns regarding perceived and real conflicts of
interest.

The Exchange is professionally managed under the

overall direction of the Board of Directors. The Board
comprises eminent professionals, representatives of
Trading Members and the Managing Director of the
Exchange. The Board is inclusive and is designed to
benefit from the participation of market intermediaries. In
terms of organization structure, the Board formulates
larger policy issues and exercises over-all control. The
committees constituted by the Board are broad-based.

The day-to-day operations of the Exchange are

managed by the Managing Director and a management
team of professionals.
The Exchange has a nation-wide reach with a presence in
417 cities and towns of India.
The systems and processes of the Exchange are designed
to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading
volumes on the Exchange showed robust growth. The
Exchange provides an efficient and transparent market for
trading in equity, debt instruments and derivatives.
The BSE's On Line Trading System (BOLT) is a
proprietary system of the Exchange and is BS 7799-2-
2002 certified. The surveillance and clearing & settlement
functions of the Exchange are ISO 9001:2000 certified.

THE NATIONAL STOCK EXCHANGE OF INDIA

LIMITED (NSE)

The National Stock Exchange of India Limited has

genesis in the report of the High Powered Study Group on
Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange
by financial institutions (FIs) to provide access to
investors from all across the country on an equal footing.

Based on the recommendations NSE was promoted by

leading Financial Institutions at the behest of the
Government of India and was incorporated in November
1992 as a tax-paying company unlike other stock
exchanges in the country.

On its recognition as a stock exchange under the

Securities Contracts (Regulation) Act, 1956 in April
1993, NSE commenced operations in the Wholesale Debt
Market (WDM) segment in June 1994. The Capital
Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment
commenced in June 2000 It is the largest stock exchange
in India and the third largest in the world in terms of
volume of transactions.

NSE is mutually-owned by a set of leading financial

institutions, banks, insurance companies and other
financial intermediaries in India but its ownership and
management operate as separate entities.

As of 2006, the NSE VSAT terminals, 2799 in total,

cover more than 1500 cities across India. In March 2006,
the NSE had a total market capitalization of 4,380,774
crore INR making it the second-largest stock market in
South Asia in terms of market-capitalization.

TYPES OF STOCKS

1. BLUE CHIP STOCKS

The term ‘blue chip’ comes from poker, where the blue
chip carries the highest value. Large established firms
with a long record of profit growth, dividend payout and a
reputation for quality management, products and service
are referred to as blue chip companies. These firms are
generally leaders in their industries and are considered
likely candidates for long term growth .because blue chip
companies are held in such high esteem, they often set the
standard by which other companies in their field are
measured .well known blue chip
Companies include IBM, Coco-Cola, general electric and
McDonald.

2. PENNY STOCKS

Penny stocks are low priced speculative stock, that are

very risky .companies with a short or erratic history of
revenues and earnings issue them .they are the lowest of
the low in price and many stock exchanges choose not
trade them.

3. INCOME STOCKS

Income stocks are those stocks that pay higher than

average dividend over a sustained period. these above
average dividend tends to be paid by large, established
companies with

stable earnings. Income stocks are popular with investors

who want steady income for a long time and who do not
need much growth in their stocks value.

4) VALUE STOCK

A value stock is a stock that is currently selling at a low

price .companies that have good earning and growth
potential but whose stock price do not reflect this are
considered value companies .both the market and
investors are largely ignoring their stocks. Investors who
buy value stocks believe that thes3e stocks are only
temporarily out of favor and will soon
experience great growth .factors such as new
management, a new product or operation that are more
efficient may make a value stock grow quickly.

INVESTMENT

Investment is the employment of the fund with aim of

achieving additional growth in value. An investment is a
sacrifice of current money or other resources for future
benefits .it is the allocation of monetary resources to
assets that are expected to yield gain or positive return
over a given periods of time .it involves the commitment
of resources which have saved or put away from current
consumption in the hope that some benefits will accrue in
future.

INVESTMENT OBJECTIVES

Are Company Fixed Deposits Suitable for an Increase

in My Investment?
A Company/HDFC Fixed Deposit provides for faster
appreciation in the principal amount than bank fixed
deposits and post-office schemes. However, the increase
in the interest rate
is essentially due to the fact that it entails more risk as
compared to banks and post-office schemes.
Are Company Fixed Deposits Suitable for Income?
Yes, Company/HDFC Fixed Deposits are suitable for
regular income with the option to receive monthly,
quarterly, half-yearly, and annual interest income.
Moreover, the interest rates offered are higher than banks.

To What Extent Does a Company Deposit Protect Me

Against Inflation?
A Company/HDFC Fixed Deposit provides you with
limited protection against inflation, with comparatively
higher returns than other assured return options.

The three key aspects of any investment are time capital

gain and risk the sacrifice takes place now and is certain.
The benefits are expected in the future and tend to be
uncertain.

Risk: investment is considered to involve limited risk and

is confined to those avenues where the principle is safe.
No investments are completely risk free

Capital gain: If purchase of securities is preceded by

proper investigation and analysis and review to receive a
stable return over a period of time it is termed as
investment.

Time: A longer time, fund allocation is termed as

investment. The investor constantly evaluates the work of
a security. There has to be a constant review of securities
to find out whether it is a suitable investment. The
investment is an attempt to carefully plan, evaluate and
allocate funds in various investments which offer safety
of principal, moderate and continuous return and long
term commitment.

INVESTMENT DECISION

In stock market parlance investment decision refers to

making a decision regarding the buy and sell orders. As
we know economic analysis or factors play in any
investment decision which is made for making a gain and
better returns. Economic analysis and forecasting
company performance and of returns is necessary for
making investment.

Any investment is risky and such investment decision is

difficult to make. It is based on availability of money and
information on economy industry and company, share
prices are ruled by expectation of the market and the
market sentiments.

As we know these decisions are influenced by availability

of money and flow of information. What to buy and sell
also depends on the fair value of shares and the extent of
over valuation and under valuation. For making such a
decision the common investors have to depend more up
on a study of fundamental rather than technical, although
technical are also important.

PRIMARY AND SECONDARY CAPITAL

MARKET

Primary market is the market for issue of new securities.

It therefore essentially consists of the companies issuing
securities, his public subscribing to these securities, his
regulatory agencies like SEBI and the government,
merchant bankers and bank who underwrite the issues and
help in collecting subscription money from the public.

Secondary Market refers to a market where securities

are traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange.
Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the
debt markets.

For the general investor, the secondary market provides

an efficient platform for trading of his securities. For the
management of the company, Secondary equity markets
serve as a monitoring and control conduit—by facilitating
value-enhancing control activities, enabling
implementation of incentive-based management contracts,
and aggregating information (via price discovery) that
guides management decisions.
Return

Return is essential spurring power that drives venture. It

refers to the reward for the activity of taking risk, Hence
the evaluation of return is important to understand the
profitability or the functioning of the firm.

There are two types of returns, those are:

& Current return:-

The segment regularly strikes a chord when one is

contemplating return is occasional income as isolated or
premium produced by the venture. Current return is
measured as the intermittent return in connection to the
starting cost of the venture.

2.Capital return:-

The second imperative part of return is reflected in the

value change called the capital return. It is basically the
cost of thankfulness (or deterioration) partitioned by the
starting cost of advantage.

Total return = capital return + current return

Risk

Chance alludes towards likelihood that the genuine result

of a venture will concede from expected result. All the
more particularly, most speculators are worried about the
genuine result being not as much as the normal result. The
more extensive scope of conceivable result is more
noteworthy the risk. The different sorts of risks are

A: Systematic risk

Efficient hazard alludes to that bit of variety consequently

brought about by components that influence the cost of all
securities. The impact is methodical return makes the
costs of all individual securities move in same bearing.
This hazard is as a matter of course and can't be
controlled. Efficient hazard emerges because of taking
after element:

1.Market risk

Variety in costs started off because of genuine social,

political and monetary occasions is alluded to as market
hazard. Showcase hazard emerges out of changes popular
and supply weights in the market taking after the
changing stream of news or desire.
2. Interest risk

By and large costs of securities tend to move contrarily

with changes in the rate of intrigue. The market
movement and financial specialists recognitions are
impacted by the adjustments in the loan fees which thusly
rely on upon nature of instruments, securities, stocks, and
so forth.
3.Risk of purchasing power

This risk refers to the type of risk where the cash flows
from an investment in future will not match value of the
present purchasing power of money. The main reason
behind this is inflation
4.Liquidation risk

The risk that comes with short term trading of stocks

which may go wrong or opposite to the speculation of the
brokers or traders. This sort of hazard is essential in some
venture speculation choice yet it is talked about widely in
speculation courses.

5.Foreign trade chance

Uncertainly this is the hazard related with potential

changes in the remote trade estimation of money.

Unsystematic risk
Unsystematic hazard alludes to that segment of hazard
that is brought on because of elements one of a kind or
identified with a firm or an industry. Unsystematic hazard
emerges because of taking after components:

1.Business risk

Business hazard can be inner and in addition outside.

Inside hazard is brought about because of shameful item
blend, non-accessibility of materials, nonattendance of
vital administration, and so forth. Outer hazard emerges
because of progress in working conditions, change in
business laws, universal economic situations, and so forth.
2.Financial risk

Monetary hazard is related with capital structure of the

organization. An organization with no obligation
financing has no budgetary hazard. The degree of money
related hazard relies on upon the use of the association's
capital structure.

RELATIONSHIP BETWEEN RISK AND RETURN:

There is certain connection between the measure of risk

assumed and the amount of returns expected. Greater the
risk, the larger the expected returns and larger the chance
of substantial loss. A rational investor would have some
degree of risk aversion, he would expect the risk only if
he adequately compensated for it.

The following figure shows relationship between the

amount of risk assumed and amount of expected returns.
Risk is measured along x-axis and return along y-axis.
Risk increases from left to right and return rises from
bottom to top. The line 0 to R(f) indicates rate of return
on risk less
investments. The diagonal curve from R(f) to E(r)
illustrates the concept of expected rate of return
increasing shows a linear relationship between risk and
return.

The monetary division in India has experienced many

changes, especially in the capital market Segment, since
1990s. The share price fluctuations in the market can
affect the economy of the nation. A fluctuation occurs in
the price level of stock because of changes in several
factors, like economic, social and political.
A part from these factors information released by the
corporate bodies causes volatile nature sin the share prices
however the corporate announcement has considerable
impact on the share price movements. Moreover the
individual investors change their investment pattern
depending upon the release of information by the
corporate bodies. In other words the corporate
announcements reflect wide variations in the share prices
and investors behavioral pattern. This fact is brought into
the companies regularly making significant
announcement with positive and negative information
which will reflect in their prices. When corporate
announcement contain good news this stock prices go up,
whereas announcements containing bad news push the
stocks price down. Given this reality the investors can
react positively or negatively depending upon whether it
is positive or negative information. Hence the market
reactions indicate that the known information is
immediately discussed by all investors and it reflects in
the share prices in stock market. The information that
affects the prices of securities is strikes, lockouts, joint
venture agreements, launching of the new products,
financial reports include annual and quarterly releases,
press releases, declaration of dividend including interim
dividend, outcome of board of directors meeting, outcome
of annual general meeting, right issues, bonus issues,
allotment of equity shares including allotment of shares
under employee stock option scheme, amalgamation,
acquisition, buy back offer and sale of shares etc. Among
these various corporate announcements giving
information, some are likely to be having most significant
impact on the share price fluctuation.
 CONCLUSIONS:

In the recent past the market has reached great

heights as a result of expansion of business and
much more of globalization, the increased
percentage of Foreign Direct Investment which has
a direct affect on the demand and supply of the
shares of a particular company. In this way the
index of the stock market has reached to the
maximum. With the boom in the market there are
many investors who are willing to take more risk
and so to cover the risk.

Financial sector is booming and the need for Risk-

Return Analysis is growing. Also because of the
very tricky stock market behaviors it has become
mandatory to manage portfolio so as to reduce the
risk while maximizing the returns. Taking into
consideration the investor’s risk-return requirements
portfolio should be constructed and reviewed
regularly.
Risk and return analysis is very essential, because it helps
to calculate future predictable returns and risk of the
stock.

The investment in stocks of in Nifty index with preferable

because of continuous appreciation of nifty index.
Investments in stocks are to be made for a longer period
of time to fetch good returns for what an investor has
invested.