A Mini-

Project on,

A study on Risk analysis of Stocks

Under
Guidance
of,
PROF.
PRIYANK
A

ISBR COLLEGE
#107 Near Infosys, Behind BSNL Telephone Exchange,
Electronic city phase 1, Bangalore-560100

Prajwal V J
192SCMD036  
 Chapter 1
INTRODUCTION
A study on Risk analysis of Stocks

Synopsis
India is one of the emerging economies, which has witnessed significant developments in the
stock markets during the liberalization policy initiated by the government. However,
investing in shares include high risks which can be guided but not controlled. Most of these
risks affect the market or the economy and require investors to adjust portfolios or ride out
the storm. This paper analyzes the risk and return in banking sector taking Nifty Index as the
benchmark. The study compares the performance of the 50 stocks in the NSE. Indian banking
industry, the backbone of the country’s economy has always played a positive key role in
prevention the economic disaster from reaching horrible volume in the country. Risk &
Return is a concept that denotes a potential negative impact to an asset or some characteristic
of value that may arise from some present process or future event. It has achieved enormous
appreciation for its strength, particularly in the wake of some of the worldwide economic
disasters. NSE Shares have proved to be more volatile than the pure diversified equity funds
which make some of them a high-risk proposition. The study evaluates the performance of
stocks mainly to identify the required rate of return and risk of a particular stock based upon
different risk elements prevailing in the market and other economic factors.

Introduction:

A stock market or equity market is a public market (a loose network of economic

transactions, not a physical facility or discrete entity) for the trading of company stock and
derivatives at an agreed price; these are securities listed on a stock exchange as well as those
only traded privately.
Stock market is a common place for both investors and for the company. Also it is an
organized market where traders and brokers are involved in buying and selling of stocks,
bonds and securities. For investors, to invest money and to get profit out of it and sometimes
may incur loss too. And for the company, it gets listed and releases IPOs i.e initial public
offering for collecting more funds for business expansion, channelizing savings and
increasing their profits. During Covid-19 also, the stock market has performed well. Thus the
stock market plays an important role in the growth of the economy of the country.

Stock or Equity market is one of the kind of investment that individual or maybe companies
will engage to gain some returns as a passive income or the full time income which may
related to their business. Basically this stock market consists of 3 major stakeholders, i.e,
Company, Investor or Public and the Government. Here the company will get listed in stock
market so as to have some expansion in their business or to have good economic benefits that
can help company to improve their profitability, the investor will usually invest due to some
expectations, calculations, to gain some money out of it. And finally the government will get
revenue in the form of taxes, etc. So all these 3 major entities will get mutual benefit from
each other. However the investor will be having some kind of risk in their returns. The
returns from the stock will depend upon so many factors.

A stock exchange is an exchange (or bourse) where stockbrokers and traders can buy and sell
shares (equity stock), bonds, and other securities. Many large companies have their stocks
listed on a stock exchange. This makes the stock more liquid and thus more attractive to
many investors.
A share price or stock price is the amount that would cost to buy one share in a company.
This share price will not be fixed and it fluctuates with respect to so many factors according
to the market conditions. The share price most of the times tells the financial health of the
respective company.
The share price of a company varies with respect to so many factors such as revenue,
dividend, earning per share, current asset, current liabilities, long-term debt, profit after tax
shareholder funds, etc

The stocks are listed and traded on stock exchanges which are entities of a corporation or
mutual organization specialized in the business of bringing buyers and sellers of the
organizations to a listing of stocks and securities together. The largest stock market is in the
United States, by market cap is the New York Stock Exchange, NYSE, while in Canada, it is
the Toronto Stock Exchange.

Major European examples of stock exchanges include the London Stock Exchange, Paris
Bourse, and the Deutsche Borse. Asian examples include the Tokyo Stock Exchange, the
Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock
Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV.
 Chapter 2
INDUSTRY PROFILE
Trading
Participants in the stock market range from small individual stock investors to large hedge
fund traders, who can be based anywhere. Their orders usually end up with a professional at a
stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a trading floor,
by a method known as open outcry. This type of auction is used in stock exchanges and
commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The
other type of stock exchange is a virtual kind, composed of a network of computers where
trades are made electronically via traders.
Actual trades are based on an auction market model where a potential buyer bids a specific
price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at
market means you will accept any ask price or bid price for the stock, respectively.) When the
bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are
multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers
and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time
trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed exchange
— only stocks listed with the exchange may be traded. Orders enter by way of exchange
members and flow down to a floor broker, who goes to the floor trading post specialist for
that stock to trade the order. The specialist's job is to match buy and sell orders using open
outcry. If a spread exists, no trade immediately takes place--in this case the specialist should
use his/her own resources (money or stock) to close the difference after his/her judged time.
Once a trade has been made the details are reported on the "tape" and sent back to the
brokerage firm, which then notifies the investor who placed the order. Although there is a
significant amount of human contact in this process, computers play an important role,
especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer
network. The process is similar to the New York Stock Exchange. However, buyers and
sellers are electronically matched. One or more NASDAQ market makers will always
provide a bid and ask price at which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was
automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange.
Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading
system was introduced, and the order matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away
from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and
Credit Suisse Group, already steer 12 percent of U.S. security trades away from the
exchanges to their internal systems. That share probably will increase to 18 percent by 2010
as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of
securities themselves, according to data compiled by Boston-based Aite Group LLC, a
brokerage-industry consultant.
Now that computers have eliminated the need for trading floors like the Big Board's, the
balance of power in equity markets is shifting. By bringing more orders in-house, where
clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and
capture a bigger share of the $11 billion a year that institutional investors pay in trading
commissions as well as the surplus of the century had taken place.

Market participants
A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy
businessmen, with long family histories (and emotional ties) to particular corporations. Over
time, markets have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-
traded funds, hedge funds, investor groups, banks and various other financial institutions).
The rise of the institutional investor has brought with it some improvements in market
operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being
markedly reduced for the 'small' investor, but only after the large institutions had managed to
break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large
institutions.
However, corporate governance (at least in the West) has been very much adversely affected
by the rise of (largely 'absentee') institutional 'owners'.

IMPORTANCE OF STOCK MARKET

 The stock market is one of the most important sources for companies to raise money.
This allows businesses to be publicly traded, or raise additional capital for expansion
by selling shares of ownership of the company in a public market.
  The liquidity that an exchange provides affords investors the ability to quickly and
easily sell securities. This is an attractive feature of investing in stocks, compared to
other less liquid investments such as real estate.
 The stock market is often considered the primary indicator of a country's economic
strength and development. Rising share prices, for instance, tend to be associated with
increased business investment and vice versa.
 Share prices also affect the wealth of households and their consumption. Therefore,
central banks tend to keep an eye on the control and behaviour of the stock market
and, in general, on the smooth operation of financial system functions. Financial
stability is the raison deter of central banks.
 Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default
on the transaction.
 The smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and services as well
as employment. In this way the financial system contributes to increased prosperity.
 An important aspect of modern financial markets, however, including the stock
markets, is absolute discretion. For example, American stock markets see more
unrestrained acceptance of any firm than in smaller markets.

Relation of the stock market to the modern financial system

The financial systems in most western countries have undergone a remarkable
transformation.
One feature of this development is disintermediation. A portion of the funds involved in
saving
and financing, flows directly to the financial markets instead of being routed via the
traditional
bank lending and deposit operations. The general public's heightened interest in investing in
the stock market, either directly or through mutual funds, has been an important component
of this process.
Statistics show that in recent decades shares have made up an increasingly large proportion of
households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and
other very liquid assets with little risk made up almost 60 percent of households' financial
wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes the form of various
kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds,
hedge funds, insurance investment of premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules for
most funds and insurance, permitting a higher proportion of shares to bonds. Similar
tendencies are to be found in other industrialized countries. In all developed economic
systems, such as the European Union, the United States, Japan and other developed nations,
the trend has been the same: saving has moved away from traditional (government insured)
bank deposits to more risky securities of one sort or another.

Financial risk associated with the stock market and individual investors,
 Riskier long-term saving requires that an individual possess the ability to manage the
associated increased risks. Stock prices fluctuate widely, in marked contrast to the
stability of (government insured) bank deposits or bonds. This is something that could
affect not only the individual investor or household, but also the economy on a large
scale. This is certainly more important now that so many newcomers have entered the
stock market, or have acquired other 'risky' investments (such as 'investment'
property, i.e., real estate and collectables).
 Every year, the noise level in the stock market rises. Television commentators,
financial writers, analysts, and market strategists are all overtaking each other to get
investors' attention. At the same time, individual investors, immersed in chat rooms
and message boards, are exchanging questionable and often misleading tips. Yet,
despite all this available information, investors find it increasingly difficult to profit.
 Stock prices skyrocket with little reason, then plummet just as quickly, and people
who have turned to investing for their children's education and their own retirement
become frightened. Sometimes there appears to be no rhyme or reason to the market,
only folly.

Primary Market and its Importance

  Primary Market is also called as the new issue market, also it is the market for issuing
new securities. Many companies, especially small and medium scale enter the primary
market to raise money from the public to expand their businesses. They sell their
securities to the public through an initial public offering.
 The securities can be directly bought from the shareholders, which is not the case for
the secondary market. The primary market is a market for new capitals that will be
traded over a longer period.
 In the primary market, securities are issued on an exchange basis. The underwriters,
that is, the investment banks, play an important role in this market, they set the initial
price range for a particular share and then supervise the selling of that share.
 Investors can obtain news of upcoming shares only on the primary market. The
issuing firm collects money, which is then used to finance its operations or expand
business, by selling its shares. Before selling a security on the primary market, the
firm must fulfil all the requirements regarding the exchange.
 After trading in the primary market, the security will then enter the secondary market,
where numerous trades happen every day. The primary market accelerates the process
of capital formation in a country's economy.
 The primary market categorically excludes several other new long-term finance
sources, such as loans from financial institutions. Many companies have entered the
primary market to earn profit by converting its capital, which is basically a private
capital, into a public one, releasing securities to the public. This phenomena is known
as "public issue" or "going public."
 There are three methods though which securities can be issued on the primary market:
rights issue, Initial Public Offer (IPO), and preferential issue. A company's new
offering is placed on the primary market through an initial public offer.

Secondary Market and its importance

Secondary Market is the market where, unlike the primary market, an investor can buy a
security directly from another investor in lieu of the issuer. It is also referred as "after
market". The securities initially are issued in the primary market, and then they enter into the
secondary market.
All the securities are first created in the primary market and then, they enter into the
secondary market. In other words, secondary market is a place where any type of used goods
is available. In the secondary market shares are maneuvered from one investor to other, that
is, one investor buys an asset from another investor instead of an issuing corporation. So, the
secondary market should be liquid. Ex: In the New York Stock Exchange, in the United
States of America, all the securities belong to the secondary market.

Secondary Market has an important role to play behind the developments of an efficient
capital market. Secondary market connects investors' favouritism for liquidity with the capital
users' wish of using their capital for a longer period. For example, in a traditional partnership,
a partner cannot access the other partner's investment but only his or her investment in that
partnership, even on an emergency basis. Then if he or she may break the ownership of
equity into parts and sell his or her respective proportion to another investor. This kind of
trading is facilitated only by the secondary market

Relation of the stock market to the modern financial system

The financial systems in most western countries has undergone a remarkable transformation.
One feature of this development is disintermediation. A portion of the funds involved in
saving and financing, flows directly to the financial markets instead of being routed via the
traditional bank lending and deposit operations. The general public's heightened interest in
investing in the stock market, either directly or through mutual funds, has been an important
component of this process. Statistics show that in recent decades shares have made up an
increasingly large proportion of households' financial assets in many countries. In the 1970s,
in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60
percent of households' financial wealth, compared to less than 20 percent in the 2000s. The
major part of this adjustment in financial portfolios has gone directly to shares but a good
deal now takes the form of various kinds of institutional investment for groups of individuals,
e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The
trend towards forms of saving with a higher risk has been accentuated by new rules for most
funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are
to be found in other industrialized countries. In all developed economic systems, such as the
European Union, the United States, Japan and other developed nations, the trend has been the
same: saving has moved away from traditional (government insured) bank deposits to more
risky securities of one sort or another.
Types of Risk
1. Systematic Risk
Systematic risk is due to the influence of external factors on an organization. Such factors are
normally uncontrollable from an organization's point of view. It is a macro in nature as it
affects a large number of organizations operating under a similar stream or same domain. It
cannot be planned by the organization. For example, the risk of higher oil prices is a
systematic risk factor. Higher oil prices affect transportation costs, which in turn, affects the
price of almost everything else in the economy. Higher oil prices result in losses for car rental
firms, trucking firms, shipping firms, and airlines. They cause higher prices for food (all of
which is transported from where it is grown to where it is sold to consumers), and raw
materials for manufacturers which leads to higher prices for finished goods. Since consumers
must pay higher prices for fuel, they have less money to spend on other consumer items
which produces losses for firms supplying these products.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. In other words, beta gives a sense of a stock's market
risk compared to the greater market. Beta is also used to compare a stock's market risk to that
of other stocks. Investment analysts use the Greek letter 'ß' to represent beta. Beta is used in
the capital asset pricing model (CAPM).
Beta is calculated using regression analysis, and one 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. A beta of less than 1 indicates 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.
Here is a basic guide to various betas:
 Negative beta - A beta less than 0 - which would indicate an inverse relation to the
market – is possible but highly unlikely. Some investors used to believe that gold and
gold stocks should have negative betas because they tended to do better when the
stock market declined, but this hasn't proved to be true over the long term.
 Beta of 0 - Basically, cash has a beta of 0. In other words, regardless of which way
the market moves, the value of cash remains unchanged.
 Beta between 0 and 1 - Companies with volatilities lower than the market have a
beta of less than 1 (but more than 0).
  Beta of 1 - A beta of 1 represents the volatility of the given index used to represent
the overall market against which other stocks and their betas are measured. Nifty is
such an index. If a stock has a beta of 1, it will move the same amount and direction
as the index. So, an index fund that mirrors the Nifty will have a beta close to 1.
 Beta greater than 1 - This denotes a volatility that is greater than the broad-based
index.

2. Unsystematic Risk
Unsystematic risk has two other names: firm-specific risk and diversifiable risk.
Unsystematic risk is the variability of returns (risk) caused by factors associated with a
particular firm. Examples include the risk of bad or fraudulent management, the risk of a
plant fire, a labor strike, or a lawsuit. These risk factors are not likely to be present in all the
firms in a portfolio at the same time. Some firms will have them and some won’t. An investor
holding a well-diversified portfolio (investments in firms in different industries and locations)
will not be concerned with unsystematic risk. For example, consider the quality of
management. Some of the firms in a portfolio will have good managers and some will have
poor managers. The net effect on the return of the portfolio will be nil. In effect, investors can
diversify away the risk posed by bad managers. The same is true for the other factors causing
unsystematic risk.

Equity Risk Premium

Equity risk premium is the price or premium which an investor gets for taking risk. It is a key
component into the expected return that we demand for a risky investment. This expected
return, is a determinant of both the cost of equity and the cost of capital. The size of the
premium varies with the risk inclusive in stocks.
The risk in return is usually measured by variance in actual returns around an expected return.
So we can say an investment is risk free when return is equal to expected.

Determinants of equity risk premiums

Risk Aversion: The first and most critical factor, obviously, is the risk aversion of investors
in the markets. As investors become more risk averse, equity risk premiums will climb, and
as risk aversion declines, equity risk premiums will fall. While risk aversion will vary across
investors, it is the collective risk aversion of investors that determines equity risk premium,
and changes in that collective risk aversion will manifest themselves as changes in the equity
risk premium. While there are numerous variables that influence risk aversion, we will focus
on the variables most likely to change over time.
a. Investor Age: There is substantial evidence that individuals become more risk averse as
they get older. The logical follow up to this is that markets with older investors, in the
aggregate, should have higher risk premiums than markets with younger investors, for any
given level of risk.
b. Preference for current consumption: We would expect the equity risk premium to
increase as investor preferences for current over future consumption increase. Put another
way, equity risk premiums should be lower, other things remaining equal, in markets where
individuals are net savers than in markets where individuals are net consumers.
Consequently, equity risk premiums should increase as savings rates decrease in an economy.
Relating risk aversion to expected equity risk premiums is not as easy as it looks. While the
direction of the relationship is fairly simple to establish –higher risk aversion should translate
into higher equity risk premiums- getting beyond that requires us to be more precise in our
judgments about investor utility functions, specifying how investor utility relates to wealth
(and variance in that wealth).

Economic Risk
The risk in equities as a class comes from more general concerns about the health and
predictability of the overall economy. Put in more intuitive terms, the equity risk premium
should be lower in an economy with predictable inflation, interest rates and economic growth
than in one where these variables are volatile.

Information
When you invest in equities, the risk in the underlying economy is manifested in volatility in
the earnings and cash flows reported by individual firms in that economy. Information about
these changes is transmitted to markets in multiple ways, and it is clear that there have been
significant changes in both the quantity and quality of information available to investors over
the last two decades. During the market boom in the late 1990s, there were some who argued
that the lower equity risk premiums that we observed in that period were reflective of the fact
that investors had access to more information about their investments, leading to higher
confidence and lower risk premiums in 2000. After the accounting scandals that followed the
market collapse, there were others who attributed the increase in the equity risk premium to
deterioration in the quality of information as well as information overload. In effect, they
were arguing that easy access to large amounts of information of varying reliability was
making investors less certain about the future.

Catastrophic Risk
When investing in equities, there is always the potential for catastrophic risk, i.e. events that
occur infrequently but can cause dramatic drops in wealth. Examples in equity markets would
include the great depression from 1929-30 in the United States and the collapse of Japanese
equities in the last 1980s. In cases like these, many investors exposed to the market declines
saw the values of their investments drop so much that it was unlikely that they would be
made whole again in their lifetimes. While the possibility of catastrophic events occurring
may below, they cannot be ruled out and the equity risk premium has to reflect that risk
Capital Asset Pricing Model
The core idea of CAPM is that only non-diversifiable risk is relevant in the determination of
expected return on any asset. Since the diversifiable risk can be eliminated, there is no reward
for bearing it. The corollary is, no matter how much total risk an asset has, only the non-
diversifiable (systematic) portion is pertinent in determining expected return. For instance, if
there are two assets A and B, A has a total risk (variance) of 40% and a systematic risk of 0.5,
B has a total risk of 20% and a systematic risk of 1.5. It is evident that A has more total risk,
while on the contrary, B has more systematic risk. In the world of CAPM, B rather than A
will have higher expected return because A has more unsystematic portion of risk that can be
diversified away. Thus, the total risk (variance) of an asset itself is not an important
determinant of the asset's expected return.
As mentioned earlier the systematic risk is measured by β. The β coefficient tells us how
much systematic risk a particular asset has relative to a portfolio that contains all assets in the
economy. The portfolio that contains all assets in the economy is called market portfolio.
This portfolio plays a central role in CAPM. The market portfolio is unobservable, and
therefore, it has to be proxied by some index like stock market. Technically speaking, β is the
covariance of a stock's return with the return on a market index scaled by variance of that
index. It is also measured as slope in the regression of a stock's return on market. To derive
the risk-return relation depicted by CAPM, let us consider two investments, one in the
Treasury bill and the other in the market portfolio. The investment in Treasury bill has a
guaranteed return, (risk-free return), and contains no systematic risk or has a β of 0. The
market portfolio (proxied by index) has a β of 1. By definition, β is the ratio of covariance to
variance. The covariance of a variable [market portfolio] with itself is the variable's variance,
Therefore, β of the market portfolio has to be 1. Those who make investment in market
portfolio take average systematic risk, and therefore, require higher return than the Treasury
bill. The difference between the return on market and interest rate is termed as market risk
premium. The Treasury bill has a β of 0 and its risk premium is zero. The market portfolio
has a β of 1 and risk premium
RM – RF . This gives two benchmarks for calculating expected returns on any asset in the
economy. CAPM predicts that risk premium varies in direct proportion to β. The return
between expected return and β posited by CAPM can be stated in the following equation.
Ri=RF + (RM – RF)βi
Where Ri= Expected Return on security i
 RF= Risk-free interest rate
βi = Systematic risk for security i
RM= Expected Return on market portfolio
RM – RF= Market risk premium
Above Equation can be interpreted as
Expected return =Price of time + Price of Risk X Amount of Risk
The first expression is the reward for waiting, i.e. delaying consumption without taking risk.
It amounts to investing in Treasury bill, the least risky investment that provides guaranteed
return and has a β of zero. The second expression is the reward per unit of risk borne. This
component is return required due to risk.
RM – RF is the reward market offers for bearing average systematic risk in addition to
waiting. The amount of systematic risk present in a security is presented by βi. Thus, the
return on any asset is risk-free rate plus the β multiplied by the market risk premium.
CAPM assumes existence of risk-free asset. Black (1972) derived a more general version of
CAPM in which it is not necessary to assume existence of risk-free asset.
This does not alter the risk-return equation depicted earlier. The only difference is that risk-
free return is replaced with another value Rz expected return of a portfolio with a β of zero.
This portfolio has no correlation with the market portfolio. This model is also known as zero-
β model. CAPM has a variety of applications. The tools of CAPM are helpful not only for
allocation of capital for real investment (machineries and factories) but also for allocation of
funds for financial investment (bonds, stocks, etc).
CAPM can be used for decisions concerning capital expenditure, corporate restructuring,
financing, investment, and evaluation of portfolio performance.
The capital expenditure decisions require estimation of cost of capital (required rate of return)
for discounting of future cash flows. CAPM helps in determination of cost of capital. To
calculate the cost of capital, the model requires three inputs: the stock's β, the market risk
premium, and risk-free return.

Basic Assumptions of CAPM

All investors:
1. Aim to maximize economic utilities.
2. Are rational and risk-averse.
3. Are broadly diversified across a range of investments.
4. Are price takers, i.e., they cannot influence prices.
5. Can lend and borrow unlimited amounts under the risk free rate of interest.
6. Trade without transaction or taxation costs.
7. Deal with securities that are all highly divisible into small parcels.
8. Assume all information is available at the same time to all investors.

Types of Implementation
Type 1: Prediction of stock values using polynomial regression
The first module corresponds to predicting the stock market values for future dates. This was
done with the help of a machine learning model.

Fig : Block diagram for module 1 (Stock value prediction)

The training data was obtained from Kaggle where the opening stock prices were from the
dates 2006-01-01 till 29-12-2017 for over 30 companies in the format YYYY-MM-DD. The
dates and the stock opening values were chosen as the variables for the machine learning
algorithm. To use the dates as a feature, it had to be converted into ordinal numbers which
was done using python library datetime and the function toordinal. The ordinal numbers
obtained as a result of these operations were then used as the independent variable and the
stock value corresponding to the ordinal number as the dependent variable. Bi-quadratic
regression was used as the model since it doesn’t overfit or underfit the training data. 2000
days were taken as the training data for the regression model. This process is shown in Fig 2.
The machine learning function was made available through Python’s sklearn and numpy
libraries. The trained model was then used to find the stock value for any date required. The
formula used for bi-quadratic regression is shown in equation (1).
Yi = β0 + β1xi1 + β2xi2 + β3xi3 + β4xi4 (1)
Where i = 1, 2, 3, ….., n.
y : dependent variable
x : independent variable
i : number of independent variables
β0 : is the regression constant
β1, β2,........., βi : is the partial regression coefficient for the independent variables, 1, 2,...., i
respectively.
The obtained graph after performing the curve fitting on the training data is plotted using
Python’s matplotlib library. This computation was performed on a remote backend Google
Cloud Server from Singapore region. The graphs produced were stored in the Google Cloud
Storage Bucket which can be viewed from the app dynamically by making calls to the API.
These graphs depict the trend of the stock value increase or decrease for the company in an
easily comprehensible manner which allows the user to make an informed decision.
Type 2: Sentiment analysis of twitter data
Using Twitter API, all tweets related to the specific company were obtained. The call to the
Twitter API results in an accumulation of 10,000 tweets related to that company in real time.
To perform sentiment analysis the obtained data must be pre-processed. The tweets were first
checked for diacritics and all non-ascii characters were removed. The removal of tweets from
the official twitter handle of that respective company was then performed in order for the
sentiment analysis results to be unbiased.
 Fig : Block diagram for module 2 (sentiment analysis)
The subsequent steps in pre-processing include removal of hashtags, removal of redundant
characters, expansion of abbreviations and uniform text capitalizations. The resultant file was
then given to Google’s Natural Language API where the subjectivity classification, semantic
association and polarity classification was performed. The output of this API was score and
magnitude. The score was then multiplied with the magnitude to obtain the sentiment as
shown in equation 2. Based on the result of this operation there were statements displayed on
the mobile application to inform the user about the public sentiment for that company. This
process is shown in Fig 3. The statement was sent through firebase to the mobile application.
The sentiment analysis is performed on live tweets so the sentiment obtained is very much up
to date in terms of public opinion which leads to more accurate results. All of these steps
were performed on a remote compute engine on the Google Cloud Platform.
Sentiment = Score * Magnitude (2)
Type 3: Risk and change in stock price calculation
Risk calculation is performed for each of the 5 companies and the result is displayed on the
mobile application. The number of days for the investment and also the amount to be invested
are obtained as user inputs through the mobile application as shown in Fig 5.

Fig : Block diagram for module 3 (Risk calculation)

The date for the current day, which is the day the investment period starts was obtained by
using the python library arrow. This date was converted into an ordinal number and the
trained regression model was used to find the stock values for all days starting from this day
till the investment period ends. These values were then compared with the stock value for the
present day and a count was kept for each, the number of days where the stock value of the
current day, was greater and lesser than the predicted values for the rest of the days. These
values when taken along with the count values formed an accurate metric for risk prediction.
Based on these two values a risk percentage range was assigned.
In order to find the dollar increase or decrease in value for each stock, mean of the predicted
values was taken and subtracted with the present day value which will be the price of the
stock the investor will be investing at. This difference if negative shows the decrease in the
stock value or if positive shows the increase in the stock value. These values along with the
risk percentage range are uploaded to the firebase from which the mobile application fetches
the information to display to the user. This process is shown in Fig 4. These calculations are
done on the google cloud server by creating a VM instance.
 Chapter 3
REVIEW OF LITERATURE
Literature review

(Lokesh, Mitta, & Sethia, 2018), their study uses the stock market dataset for training the
model, sentiment analysis on tweets and risk calculation to overcome the existing barrier and
making the riches of stock market investment available for all. Also confidently said that the
proposed system differs from the existing system in the sense that, unlike other systems, it
does not try to predict the accurate stock value of the company but rather assigns a risk
percentage corresponding to each company based on sentiment analysis and machine learning
results.
(Bhargava et al.), focused to study the relationship between macro variables such as Inflation,
Index of Industrial production(IIP), Money Supply, Oil prices, Exchange rates, Gold prices
and Gross domestic product (GDP) and Stock Prices using time series regression. Ther study
revealed that only Exchange Rate, Oil Prices and Inflation have significant impact over Stock
prices. Also they observed that Exchange Rate and Inflation are negatively related to Stock
prices and Oil prices are positively related.

(Challa and G.V.Chalam), aimed to examine the empirical relationship between stock prices
and company specific intrinsic factors or accounting variables like Book Value, Dividend per
Share, Earnings per Share, Size of the Firm, Dividend Payout ratio, Dividend Yield, Return
on Net worth and P/E ratio on the equity prices of listed companies in Bombay Stock
Exchange. From the results obtained using multiple regression tools in their statistical
analysis, also their paper confirms the significance of book value and return on net worth as
determinants of market share price.

(Dr. Hari Om and Goel), attempted to analyze the effect of different determinants on the
market price of the share in the context of Indian economy. The variables considered in their
research are Return on Equity, Dividend Per Share, Earning Per Share, Dividend payout ratio,
Debt equity Ratio, Total asset turnover ratio and Dividend Yield. In their research,
Correlation, Multicollinearity and regression Analysis have been used to analyze the data in
statistical tools to analyze the impact of these determinants in market price.

(E.Geetha and Ti. M. Swaminathan), made an attempt to analyse the influencing factors like
EPS, book value, P/E ratio and dividend yield which affects the movement of stock price
either upward or down trend and performance in the market. Also examined that there is a
significant relationship between book value, earnings per share and price earnings ratio
towards the market price of the share.

(Sharif et al.), studied to identify the main determinants affecting share prices in the Bahrain
financial market. The main aim of their study was to enlighten the investors about the key
indices which can assure them at least nominal and fair returns on their investment. During
this research, variables that had been studied are return on equity, book value per share,
earnings per share, dividend per share, dividend yield, price earnings, debt to assets to infer
their impact on market price of shares in the respective market. 

(PERIKALA & REDDY, 2019), their paper analyses the risk return relationship of Indian
equity markets, S&P BSE Sensex and C&X Nifty, for the period 2008-2009 through 2017-
2018. It uses the return variables like annualized main return, maximum return and minimum
return. It also uses standard deviation, variance and coefficient of variation as the measures of
risk factors. The results from the study indicated that the year 2008-09 was very bad for the
investors as the markets yielded negative returns whereas the year 2009-10 was the best year that
yielded highest returns during the study period. It is also aptly proven by coefficient of variation,
being the better measure of analysing the risk adjusted performance of the markets. Also, their
paper helps the investors in understanding the performance of the markets and takes appropriate
investment decisions.

(Prabhu, 2018) evaluated the performance of stocks mainly to identify the required rate of
return and risk of a particular stock based upon different risk elements prevailing in the
market and other economic factors. It is concluded that the stock market is sometimes highly
volatile. It depends upon the investors how he can make use of this in order to get the money
which he has put in the market.
 Chapter 4
RESEARCH METHODOLOGY
Problem Statement:
It is known that there are a lot of factors that determine the price of a share in the stock
market. So in this manner, an attempt has been made to analyze how the share price has
fluctuated and there's been an impact of covid 19 on the company’s performance, trying to
understand whether there is any slowdown in the performance.

Title of the study

“A study on Risk analysis of Stocks”

Objectives of the study

 To analyze the risk and return of the 50 stocks listed in Nifty of NSE.
 To find the relationship between returns and volatility with Beta and Standard
Deviation.

Research Methodology
Being an explanatory research, it is based on the secondary data. The data collection is done
through various sources like newspapers, articles from different journals and from different
websites. Considering the objectives, the descriptive research design is adopted for the study.

Data collection
The data published or un-published which are already been collected and processed by some
agency and take over from there and used by any other agency for their statistical are termed
as secondary data. This data was obtained from the survey reports, magazines, some of the
records.

Tools used for the study

Microsoft Excel
 Chapter 5

DATA ANALYSIS AND

INTERPRETATION
Beta & Standard deviation of top 50 companies

Sl. No. Company Name Beta Standard

Deviation
1 ACC Ltd. 1.18 7.57
2 Adani Ports & Special Economic Zone Ltd. 1.32 10.01
3 Ambuja Cements Ltd. 1.33 8.06
4 Asian Paints Ltd. 0.886 7.94
5 Aurobindo Pharma Ltd. 0.467 10.09
6 Axis Bank Ltd. 1.9 9.60
7 Bajaj Auto Ltd. 0.83 6.14
8 Bank of Baroda 0.941 9.80
9 Bharat Petroleum Corporation Ltd. 1.52 9.5
10 Bharti Airtel Ltd. 0.628 6.54
11 Bharti Infratel 0.436 7.68
12 Bosch Ltd. 1.42 9.56
13 Cipla Ltd. 0.690 7.70
14 Coal India Ltd 1.02 7.76
15 Dr. Reddy's Laboratories Ltd. 0.239 8.06
16 Eicher Motors Ltd. 1.21 9.30
17 GAIL (India) Ltd. 0.841 8.09
18 Grasim Industries Ltd. 1.15 7.69
19 HCL Technologies Ltd. 0.246 7.01
20 HDFC Bank Ltd. 1.00 4.77
21 Hero MotoCorp Ltd. 1.08 6.83
22 Hindalco Industries Ltd. 1.42 10.57
23 Hindustan Unilever Ltd. 0.875 6.39
24 Housing Development Finance Corporation 1.15 6.08
Ltd.
25 I T C Ltd. 0.524 6.40
26 ICICI Bank Ltd. 1.5 8.42
27 Indiabulls Housing Finance 1.56 10.66
28 Indian Oil Corporation Ltd. 1.31 10.31
29 IndusInd Bank Ltd. 1.44 7.33
30 Infosys Ltd. 0.313 6.22
31 Kotak Mahindra Bank Ltd. 1.08 6.14
32 Larsen & Toubro Ltd. 1.81 9.28
33 Lupin Ltd. 0.246 8.64
34 Mahindra & Mahindra Ltd. 1.06 6.72
35 Maruti Suzuki India Ltd. 1.20 7.38
36 NTPC Ltd. 1.24 9.19
37 Oil & Natural Gas Corporation Ltd. 1.21 9.30
38 Power Grid Corporation of India Ltd. 0.918 6.31
39 Reliance Industries Ltd. 0.961 8.07
40 State Bank of India 1.78 10.05
41 Sun Pharmaceutical Industries Ltd. 0.490 8.87
42 Tata Consultancy Services Ltd. 0.337 6.18
43 Tata Motors (DVR) 1.48 9.66
 44 Tata Motors Ltd. 1.24 9.05
45 Tata Power Co. Ltd. 1.68 9.85
46 Tata Steel Ltd. 1.20 11.83
47 Tech Mahindra Ltd. 0.48 7.23
48 UltraTech Cement Ltd. 1.25 8.13
49 Wipro Ltd. 0.417 6.46
50 Yes Bank Ltd. 1.83 10.22
51 Zee Entertainment Enterprises Ltd. 0.992 7.07

Beta describes the relationship between the stock returns and the index returns. From the
Betas of 50 stocks, it is found that some stocks move in the opposite direction to the market,
some stocks move along with the market, some stocks are less volatile compared to the
market and some stocks are more volatile compared to the market. From the study following
major findings are made
All the top stocks have a positive beta values according to which the stock values
move as per the movement of the market index. The stocks of Aurobindo Pharma Ltd., Bank
of Baroda, Power Grid Corporation of India Ltd., Tech Mahindra Ltd. Etc. are less volatile in
nature. This is mainly because their beta values are comparatively lesser than the markets
beta value.
The stocks of Zee Entertainment Enterprises Ltd., Wipro Ltd., Lupin Ltd. etc. are
moderately volatile in nature. This is because their values are comparatively closer to the
markets beta value.
 The stocks of Yes bank and Axis bank have high volatility. This is because of the fact
that their beta values are more than the markets beta value.

Conclusion
As a whole the stock market is sometimes highly volatile. It depends upon the
investors how he can make use of this in order to get the money which he has put in the
market. An investor should be in a position to analyze the various investment options
available to him and thus minimize the risk and maximize the returns. Beta is useful for
comparing the relative systematic risk of different stocks & in practice. Also, it is used by
investors to judge a stock’s riskiness. The investor should keep the risk associated with the
return proportional as risk is directly correlated with return. It is generally believed that
higher the risk, the greater the reward but seeking excessive risk does not ensure excessive
return. At a given level of return, each security has a different degree of risk. Based on the
calculations the investor can come to a conclusion that investors should analyze the market
on a continuous basis which will help them to pick the right

Also the Covid-19 made the world live in a VUCA environment. Even then the
companies belonging to IT, Electric power, FMCG, logistics, Pharma sector industries
performed well during this pandemic also. So it can be drawn that the Covid-19 pandemic
affected the performance of the companies resulting in the factors affecting the share prices
also to get affected.
Chapter 6
References
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