Every Investment Entails Some Degree

Published Date: 02 Nov 2017

The shares / stock, which is issued to get dividend in the remaining portion of profit after paying to debentures, bonds preferred stock is called ordinary share. The ordinary shareholders are the real owner of the company. Equity shares are the important source of the long term capital. It pays an important role in the capital structure. These types of capital are called equity capital. Common stock does not get any special right but it has voting right. Common stockholder are the main risk bearer of the company.

"Common stock represents an ownership position. The holders of common stock are the owners of the firm, have the voting power that, among the things, elect the board of directors and have a right to the earnings of the firm after all expenses and obligations have been paid; but they also run the risk of receiving nothing if earnings are insufficient to over all obligations."

Common stockholders are the real owners of the company. They have voting right. Shareholders can elect board of directors. Common stock is more risky as compared to bonds and preferred stocks issued by the same company. Cash payoff to the common stock comes in terms of cash dividend or capital gain. Features of common stock are as follows:

Common stockholder gets a stock certificate having stockholder's name and address.

Common stockholders are the owner of the company. They have voting right and they have right to elect board of directors from themselves.

Common stockholders have secondary right to asset and profit. The common stockholders get dividend and assets after paying creditors and preferred stockholders.

Common stockholders have the primitive right to purchase any new issue of their company's stock. Common stock does not mature till bankruptcy of the company.

Common stock has right risk and uncertainty of return rather than bonds preferred stocks.

1.12.4 Meaning of Return

Return is the main aim of investment, which has associated a certain degree of risk. Return is a reward from investment. The concept of return has different meaning to different investor. However, the major purpose of investment is to get more return or incomes on the funds invest. Some investor seek near term cash inflows and give less value to more distant return such a investor might purchase the stock of other firm that pays a large cash dividends. Other investors are concerned primarily with growth. They would seek projects that offer the promise of long term, higher than average growth of sale, earning and capital yield.

Most of investors invest the money at present for getting more expectation of return in the future. Return is the motivating force and it is the key method available to investors in comparing alternatives investments. Realized returns and expected returns are two terms, which is often, used in the language of investment. Realized return is after the fact return, return that was earned or it is history. Expected return is the return from an asset that investor will earn over some future period. It is a predicted return, which may or may not occur.

In common stock, there are two types of return or in other words, common stock holder could get cash payoff in two forms. They are:

Capital gain or loss

Cash dividend gain

"In general, the return on any security can be viewed as the cash the security holders receives (including liquidation at the end of the period) dividend by the initial investment"

1.12.4.1 Rate of return

The rate of 5return is important because it measures the speed at which the investor's wealth increases. It is imply the total return an investor would receive during the specific period or holding period.

Symbolically,

HPRj = Pt+1-Pt+Dt+1

Pt

'OR'

HPRj = Pt-Po+D1

Po

Where,

Pt+1 or pt = the ice of the investment at the end of the period on stock j.

Pt or Po = the price of the investment at the beggining of the period on stock j.

Dt+1or D1= cash received during the period on stock j.

1.12.4.2 Expected rate return

"The expected rate of return of holding period return is based upon the expected cash receipts over the holding period and the expected ending or selling price. Depending upon the assumption made about cash receipts and ending price, a number of expected rates of return are possible. These possible rates of return estimated by the investor are summarized in an expected rate of return. The expected rate of return must be greater or equal to the required rate of return in order for the investor to find the investment acceptable."

"The expected rate of return is calculated by summing the products of the rates of the rate of return and their respective probabilities."

It can be denoted as follows:-

∑HPRj

HPRj = n

Where,

HPRj = Mean rate of return of stock j.

n = Number of years that the return is taken.

∑HPRj = Sum of rate of return of stock j.

1.12.5 Meaning of Risk

Risk is creation by the cause of the future uncertainty. Investment decision depends upon two factor i.e. risk and returns. Risk is the fluctuation of actual return and expected return. Risk refers to the chance that sine unfavorable event will occur. Risk and uncertainty are an integral part of an investment decision.

Risk is the unlooked for the unwanted event in the future. Someone had said that risk was the sugar and salt of the life. Therefore, everyone encounters risk and uncertainty in everyday life.

"Risk defined most generally, is the probability of the occurrence of unfavorable outcomes but risk has different meanings in different contexts. In our context, two measures developed from the probability distribution have been used as initial measures of return and risk. They are the mean and standard deviation of the probability distribution."

"Risk is defined as Webster's as "a hazard; exposure to loss or injury." Thus, risk refers to the chance that some unfavorable event will occur. It anybody engage in skydiving, such people are taking chance with his life skydiving is risky."

"In the most basic sense, risk is the chance of financial loss. Assets having greater chance of loss are viewed as more risky than those with lesser chances of loss. More formally, the term risk is used interchangeably with uncertainty to refer to the variability of returns associated with a given asset."

"Risk in holding securities is generally associated with the possibility that realized returns will be less than the returns that were expected. The source of such disappointment is the failure of dividends (interest) and / or the security's price to materialize as expected."

1.12.5.1 Total risk – systematic risk and unsystematic risk

Total variation of the total risk of return for individual security is measured by the standard deviation of the rate of return.

Van Horne had dividend the total risk into two main parts:

Systematic risk

Unsystematic risk.

Similarly, Butters, et all had also expressed that security's total risk can be divided into "that portion which is peculiar to a specific firm and can be diversified away (called unsystematic risk) and that portion which is market related and non diversifiable (called systematic risk)

Thus,

Total risk = unsystematic risk + systematic risk

(Diversifiable risk, (non-diversifiable

Firm specific) market related)

According to CAPM total risk is divided into two parts. They are systematic and unsystematic risk.

1.12.5.2 Systematic Risk

The market risk is known as the systematic risk. It related to the market as a whole and arises from the tendency of stock returns to fluctuate with the market returns. Systematic risk is that portion of total variability in return caused by market factors that simultaneously affected the prices of all securities. It cannot be diversifiable away. Thus, it is also called non-diversifiable risk or unavoidable risk or beta risk. Changes in economic, political and sociological environment that affects securities market which systematically affected all firms. The measure of systematic risk promise investors to evaluate an assets required rate or return relative to the systematic risk of the stock.

Diversifiable risk or unsystematic risk of a security is unique to the firm that issued the securities. Events such as emergence of a new competitor, plant, breakdown, lawsuit, non- availability of raw materials, management errors, advertising campaigns, etc cause unsystematic variability in the value of a market asset. These types of risk primarily affect a specific firm and not all firms in general. "Hence risk arising from them can be diversified away by including several securities in a portfolio."

1.12.5.3 Unsystematic Risk

Unsystematic risk is those portions of total risk which can be reduce through diversification away. Unsystematic risk is risk unique to a particular company of industry. It is independent of economic manner. It is caused by events particulars to the particular firm such as labor strikes, management errors, inventions, advertising campaigns shift in consumer required etc. So, these types of risk can be eliminating through sound management. It is also called non- market risk or avoidable risk or company specific risk or diversifiable risk.

"Non-diversifiable risk is systematic risk is that portion of total variability in return caused by market factors that simultaneous affect the prices of all securities." Economic factors like money supply, inflation, level of government spending, industrial policy as well as political and sociological changes are source of systematic risk. These types of factors affect return on all firms and investors cannot avoid the risk arising from them. However, diversification can avoid these risk but," put differently such risk cannot be diversified away."

The relationships among total risk, systematic risk and unsystematic risk are show below:

Total risk (j) = Systematic risk + Unsystematic risk

Where,

Systematic risk = (j) (Pjm) and Unsystematic risk = (j) (1-Pjm)

In the equation Pjm is the correlation coefficient between the returns of a given stock j and the return on market portfolio.

1.12.5.4 Standard deviation

"First the variance of an assets rate of return or the weighted average rate of standard deviation of possible occurrences is calculated from the mean value of the distribution, with the weight being the probabilities of occurrences. The square root of the figures or variance of rate of return provides standard deviation.

Standard deviation is often denoted by (j) and Variance by 2."

1.12.5.5 Beta Coefficient

Market sensitivity of stock is explained in terms of beta. Higher the beta greater will be the sensitivity and reaction to the market movement. Beta is a systematic risk, which cannot be eliminated through the means of diversification. An investor can use the beta measure to assess the risk level of an asset or portfolio.

"Beta measure non-diversifiable risk. Beta shows how the price of a security responds to market forces. In effect, the more responsive the price of security is to changes in the market, the higher will be its beta. Beta is calculated by relating the returns on security with the returns for the market. Beta can be positive or negative. But nearly all bets are positive.

Y

R1

return

R2

R3

X

0 1 2 3

Risk

Figure 1.1 Relationships between Risk and Return

The figure represents higher premium for higher risk in a linear fashion indicating premium of (R1-Rf) for 1 degree of risk (R2 – Rf) for 2 degree of risk and so on. The assumption of linear relationship states the risk premium increases or decreases in proportion to change in level of risk. Rf stands for return on risk free security. The partial interest is the difference in rates of return across securities, since they provide valuable clues to the markets trade-off between risk and return. Scientific progress in any field depends on occur measurement. Many measurements are interesting in themselves by their most important scientific role is to test the validity of theory. Since most financial theory is focused on an explanation of the level, structure and behavior of rates of return, their accurate measurement is essential if the theory is to be tested and improved."

Chapter II

Data presentation and Analysis

This chapter contains presentation, interpretation and analysis of the collected data. Details data of closing market value per share (MPS), earning per share (EPS), and dividend of each bank and relevant data of NEPSE indices is presented and their interpretation and analysis is done. With reference of various reading and literature review in the proceeding chapter, the effort has been made to analyze and established the relationship between risk and return of stock investment with special reference to selected listed commercial bank. This chapter also analyzed that systematic and unsystematic risk of each commercial bank. Different tables and diagrams are prepared to interpret band analyze the collected data in meaningful way.

2.1 Financial Analysis of Selected Listed Commercial banks

Among 23 commercial banks operating in Nepal, only 18 are listed in NEPSE till F/y 2007/08. Among those, the study has only taken two commercial banks listed in NEPSE. Which was already mentioned in the research methodology? Data collection is being done of seven years from 15th July 2001 to 15th July

2008. Details analysis based on risk, return DPS, EPS etc. are shown as follows:-

2.1.1 Standard Chartered Bank Nepal Limited (SCBNL):-

2.1.1.1 Periodical closing MPS, EPS and Total Dividend of SCBNL:-

Closing market price of share, total dividend records and EPS of common stock of the bank are shown in table below. This analysis is based on the year ended MPS and EPS which shows the relationship between MPS and EPS with dividend payout ratio. The total dividend is calculated as the method mentioned in the research methodology in chapter 1.

Table.2.1 periodical closing MPS, EPS and Total Dividend Data of SCBNL:-

Fiscal year

Closing MPS

Cash Dividend

Stock Dividend

Total Dividend

EPS

2001/02

1575

100

-

100

141.13

2002/03

1640

110

20 percent

459

149.30

2003/04

1745

110

10 percent

344.5

143.55

2004/05

2345

120

20 percent

875

143.14

2005/06

3775

130

40 percent

2490

175.84

2006/07

5900

80

30 percent

2129

167.37

2007/08

6830

80

30 percent

80

131.92

(Source:-NEPSE and SCBNL annual report 2007/08)

According to the above table, it shows that the highest closing MPS of the common stock is 6830 in the FY 2007/08 and the highest EPS is 175.84 in the FY 2005/06. Similarly, the lowest MPS is 1575 in the FY 2001/02 and lowest EPS is 131.92 in the FY 2007/08 respectively. After the year 2001/02 the banks Mps are increasing gradually. The movement of the MPS and EPs is presented graphically in the following diagram:-

Figure 2.1 Movement of MPS and EPS of SCBL

2.1.1.2 Calculation of Annual Rate of Return/ Holding Period Return (HPR) of SCBL:-

Closing MPS and total dividend including Cash and stock dividend of the bank are used to calculate the Holding Period Return of the bank for each year. And the closing MPS and Cash Dividend of the bank are adjusted accordingly.

Table2.2 Calculation of Annual Rate of Return of SCBNl:-

Fiscal Year

Closing MPS

Cash Dividend

Annual returns of SCBNL(HPR SCBNL)

2001/02

1575

100

-

2002/03

1640

459

0.3327

2003/04

1745

344.5

0.2741

2004/05

2345

875

0.8453

2005/06

3775

2490

1.6716

2006/07

5900

2129

1.1269

2007/08

6830

80

0.1712

The Annual Rate of Return of each year is calculated as follows:-

Annual Rate of Return of SCBNL in the F/Y 2007/08

P1-Po+D1

(HPR SCBNL) = Po

6830-5900+80

= 5900

= 0.1712

The Annual Rate of Returns of SCBNL is graphically shown in the following figure;-

Figure2.2 Annual Rate of Return of SCBNL

Table 2.3 Calculation of Mean Rate of Return, Standard Deviation and Co-efficient of Variation of SCBNL:-

Here, the Calculation of Mean Rate of Return, Standard Deviation and Correlation Coefficient of

SCBNL are calculated. The Annual Return Is derived from above table:-

Fiscal Year

Annual Return(HPRSCBNL)

(HPRSCBNL-HPRSCBNL)

(HPRSCBNL-HPRSCBNL)2

2001/02

-

-

-

2002/03

0.3327

-0.4043

0.1635

2003/04

0.2741

-0.4629

0.2143

2004/05

0.8453

0.1083

0.0117

2005/06

1.6716

0.9346

0.8735

2006/07

1.1269

0.3899

0.1520

2007/08

0.1712

-0.5658

0.3201

∑HPRSCBNL= 4.4218

∑(HPRSCBNL-HPRSCBNL)2 = 1.7351

∑HPRSCBNL 4.4218

Mean rate of return (HPRSCBNL) = = = 0.7370

n 6

Standard Deviation (SCBNL) = ∑ (HPRSCBNL-HPRSCBNL) 2 1.7351

= = 0.5378

n 6

SCBNL 05378

Co-efficient of Variation (CVSCBNL) = = = 0.7297

HPRSCBNL 0.7370

Mean rate of return of SCBNL is 0.7370 and Standard Deviation and Co-efficient of Variation of SCBNL is 0.5378 and 0.7297 respectively. Mean rate of return of SCBNL is greater than Standard Deviation of SCBNL. In this situation investment is favorable in SCBNL's Stock.

2.1.2Nepal Investment Bank limited (NIBL):-

2.1.2.1 Periodical Closing MPS, EPS and Total Dividend of NIBL:-

Closing market price of share, total dividend records and EPS of common stock of the bank are shown in table below. This analysis is based on the year ended MPS and EPS which shows the relationship between MPS and EPS with the dividend payout ratio. The total dividend is calculated as the method mentioned in the research methodology in chapter I.

Table 2.4 Periodical Closing MPS, EPS and Total Dividend Data of NIBL;-

Fiscal Year

Closing MPS

Cash Dividend

Stock Dividend

Total Dividend

EPS

2001/02

760

-

30 percent

238.5

33.59

2002/03

795

20

20 percent

208

39.56

2003/04

940

15

15 percent

135

51.70

2004/05

800

12.5

12.5 percent

170

39.50

2005/06

1260

20

55.46 percent

978.90

59.35

2006/07

1729

5

30 percent

740

62.57

2007/08

2450

7.5

40.83 percent

7.50

57.87

(Source:- NEPSE and NIBL annual report 2007/08)

In this above, it shows that the highest closing MPS and EPs of the common Stock are 2450 in FY 2007/08 and the highest EPS is 62.57 in FY2006/07. Similarly, the lowest MPS and EPS are 760 and 33.59 respectively in the FY2001/02. After the year 2001/02 the bank's MPS are increasing gradually. The movement of the MPS and EPS is presented graphically in the following diagram:-

Figure 2.3 Movement of MPS and EPS of NIBL

2.1.2.2 Calculation of Annual Rate of Return/ Holding period Return (HPR) of NIBL:-

Closing MPS and total dividend including Cash and stock dividend of the bank are used to calculate the Holding Period return of the bank for each. And the closing MPS and cash Dividend of the bank are adjusted accordingly:-

Table 2.5 Calculation of Annual Rate of Return of NIBL:-

Fiscal Year

Closing MPS

Cash Dividend

Annual Return of NIBL (HPRNIBL)

2001/02

760

2138.5

-

2002/03

795

208

0.3197

2003/04

940

135

0.3522

2004/05

800

170

0.0319

2005/06

1260

978.90

1.7986

2006/07

1729

740

0.9595

2007/08

2450

7.5

0.4213

(Source: - Annual Report of NIBL)

The Holding Period Return of NIBL each year is calculated as follows:-

Holding Period Return of NIBL in the FY 2007/08

P1-Po+D1

(HPR NIBL) = po

2450-1729+7.5

= 1729 = 0.4213

The above calculated Annual Rate of Return of NIBL is depicted in the following Figure:-

Figure2.4 Annual Rate of Return of NIBL

2.1.2.3 Calculation of Mean Rate of Return, Standard Deviation and Co-efficient of Variation of NIBL:-

Here the Calculation of Mean Rate of Return, Standard Deviation and correlation Co-efficient o

NIBL are calculated. The Annual Return Is derived from Above table.

Table2.6 Calculation of Mean Rate of Return, Standard Deviation and Co-efficient of Variation of NIBL:-

Fiscal Year

Annual Return (HPRNIBL)

(HPRNIBL-HPRNIBL)

(HPRNIBL-HPRNIBL)2

2001/02

-

-

-

2002/03

0.3197

-0.3275

0.1073

2003/04

0.3522

-0.295

0.0870

2004/05

0.0319

-0.6153

0.3786

2005/06

1.7986

1.1514

1.3257

2006/07

0.9595

0.3123

0.0975

2007/08

0.4213

-0.2259

0.0510

∑(HPRNIBL)=3.8832

∑(HPRNIBL-HPRNIBL)2 == 2.0472

∑ (HPRNIBL) 3.882

Men Rate of Return (HPRNIBL) = = = 0.6472

n 6

∑ (HPRNIBL-HPRNIBL) 2 2.04

Standard Deviation (NIBL) = = = 0.5841

n 6

NIBL 0.5841

Coefficient Variation (CVNIBL) = = = 0.9025

HPRNIBL 0.6472

Mean rate of return of NIBL is 0.6472 and Standard Deviation and Co-efficient of Variation of NIBL 0.5841 and 0.9025 respectively. Mean rate of return of NIBL greater than Standard deviation of NIBL. In situation investment is favorable in NIBL's stock.

2.2 Inter Firm Comparison

In this part, comparison between SCBNL and NIBL on behalf Mean rate of return, Standard Deviation, Co-efficient of Variation and Beta Coefficient has been presented.

Table2.7 Comparative Analysis between SCBNL and NIBL:-

Bank

Mean Rate of Return

Standard Deviation

Co-efficient of Variation

Remarks

Return SD CV

SCBNL

0.7370

0.5378

0.7297

Highest Lowest Lowest

NIBL

0.6478

0.5841

0.9025

Lowest Highest Highest

From the above table, it can be seen that stock of SCBNL has higher mean of return i.e. 0.7370 than that of NIBL i.e. 0.6478. Also the risk is high in the stock of NIBL i.e. 0.5841 than of SCBNL i.e. 0.5378.Coefficient of Variation gives the best result for choosing the investment to the investor. If the common stock has low the co-efficient of Variation, it will be lower risk. Thus, the investor must be chosen which stock that has the lower coefficient of variation. The comparison can be also shown with the help diagram below:-

Figure 2.5 Comparative Analysis of the selected Banks

Fiscal Year

SCBNL(Rs.)

NIBL(Rs.)

2001/02

141.13

33.59

2002/03

149.30

39.56

2003/04

143.55

51.70

2004/05

143.14

39.50

2005/06

175.84

59.35

2006/07

167.37

62.57

2007/08

131.92

57.87

Total

1052.25

344.14

Average EPS

150.32

49.16

Table 2.8 Comparative Analysis of EPS of selected Banks:-

Comparing the Average EPS, the EPS of the SCBNL is the highest. It has more than Rs. 100 EPS each year. NIBL's Average EPS is the lowest than SCBNL.

Table 2.9 Comparative Analysis of Closing MPS of selected Banks:-

Fiscal Year

SCBNL (Rs)

NIBL(Rs.)

2001/02

1575

760

2002/03

1640

795

2003/04

1745

940

2004/05

2345

800

2005/06

3775

1260

2006/07

5900

1729

2007/08

6830

2450

Total

23810

8734

Average MPS

3401.43

1247.71

According to the above table, the average MPS of SCBNL is highest. It has the greater MPS of Rs. 3401.43 which is the highest Closing MPS compare to NIBL. The average MPS of NIBL is lower than SCBNL.

Table 2.10 Comparative Analysis of Total DPS of selected Banks:-

Fiscal Year

SCBNL(Rs.)

NIBL(Rs.)

2001/02

100

238.5

2002/03

459

208

2003/04

344.5

135

2004/05

875

170

2005/06

2490

978.90

2006/07

80

5

2007/08

80

7.5

Total

4428.5

1742.9

Average DPS

632.64

248.99

After looking at the above table, we can find that Average DPS of SCBNL is the highest Comparing to NIBL which is 632.64 while the NIBL is 248.99

Table2.11 Comparative Analysis of P/E Ratio selected Banks:-

Banks

MPS

P/E Ratio = EPS

Remarks

SCBNL

22.63

Lowest

NIBL

25.38

Highest

According to the P/E Ratio table, NIBL has the highest P/E Ratio i.e. 25.38 times while SCBNL has lowest i.e. 22.63 times. In indicates that NIBL bank has a bright Future.

2.3 Comparison with Market

There is only stock exchange in Nepal where stocks are traded. Nepal Stock Exchange (NEPSE) is a non-profit organization operating under securities exchange act 1983. Overall market movement is represented by market index. Following is the calculation of market return, its standard deviation and coefficient of variation of NEPSE from 2001/02 to 2007/08.

Calculation of Annual Rate of Return/ Holding Period Return of NEPSE:-

Table 2.12 Calculation of Annual Rate of Return of NEPSE

Fiscal Year

NEPSE Index (Rs.)

Annual Return of NEPSE (Rm)

2001/02

227.54

-

2002/03

204.86

-0.0997

2003/04

222.04

0.0839

2004/05

286.67

0.2911

2005/06

386.83

0.3494

2006/07

683.98

0.7681

2007/08

963.36

0.4085

∑Rm = 1.8013

(Source: Periodic Trading Reports of NEPSE)

The annual rate of return of beach year is calculated as follows:-

P1-Po+D1 963.36-683.95+0

Return of NEPSE in the FY 2007/08 = = = 0.4085

Po 683.95

NEPSE index is the highest in the FY 2007/08, which is Rs. 963.36. The lowest index is Rs. 204.86 in the FY 2002/03.

NEPSE's returns are negative in the FY2002/03 which is -0.0997 respectively. On the contrary, there are positive returns of 0.0839, 0.2911, 0.3494, 0.7681 and 0.4085 in the FY 2003/04, 2004/05, 2005/06, 2006/07 and 2007/08 respectively. Total return of NEPSE (2001/02 to 2007/08) is 1.8013. Returns are clearly shown in the table ahead.

NEPSE's indices trend is decreased in the FY2002/03 trend due ton political disturbance, instability and lack of peace.

For increasing NEPSE index government should make peace and political stability in the country.

Figure2.6 Annual rate of return of NEPSE

Calculation of Mean Rate of Return, Standard Deviation and Coefficient of Variation of NEPSE:-

Here, the calculation of Mean Rate of Return, Standard Deviation and Correlation Coefficients of NEPSE are calculated. The Annual Return is derived from Above table.

Table 2.13 Calculation of Mean Rate of Return, Standard Deviation and Coefficient of Variation of NEPSE:-

Fiscal Year

Return (Rm)

(Rm-Rm)

(Rm-Rm)2

2001/02

-

-

-

2002/03

-0.0997

-0.3999

0.1599

2003/04

0.0839

-0.2163

0.0468

2004/05

0.2911

-0.0091

0.0000

2005/06

0.3494

0.0492

0.0024

2006/07

0.7681

0.4679

0.2189

2007/08

0.4085

0.1083

0.0117

∑Rm = 1.8013

∑(Rm-Rm)2 =0.4397

∑Rm 1.8013

Mean Rate of Return (Rm) = = = 0.3002

n 6

∑ (Rm-Rm) 2 0.4397

Standard Deviation (m) = n = 6 = 0.2707

m 0.2707

Coefficient of Variation (CVm) = = = 0.9017

Rm 0.3002

Mean rate of return of NEPSE is 0.3002. In the same way, Standard Deviation and Efficient of Variation of NEPSE are 0.2707 and 0.9017 respectively.

2.2.3 Beta Coefficient, Correlation of Coefficient and Total Risk of the selected Commercial Bank.

The Beta Coefficient measures the systematic risk, which cannot eliminate through the means of diversification. Beta Coefficient explains the market sensitivity of stock. Higher the beta represents greater the sensitivity and higher the reaction to the market movement. For the individual stock, the beta could be less than equal to or more than one depending upon the volatility of the stock return relative to market return. Beta lies between +1 to -1, if beta is more than one that stock is called the aggressive stock. In the following table shows the beta coefficient, Correlation Coefficient, systematic risk and unsystematic risk of each of selected commercial banks, which are calculated and presented in the appendices.

Table 2.14 Beta Coefficient, Correlation Coefficient and Total risk of banks:-

Banks

Beta Coefficient

Correlation Coefficient

Systematic Risk

Unsystematic risk

SCBNL

1.075

0.5412

0.2911

0.2467

NIBL

0.8611

0.3991

0.2331

0.3510

(See: Appendix II for calculation)

From, the above table, it shows that the beta coefficient of SCBNL with markets is greater than 1it is called an aggressive and beta coefficient of NIBL with market is less than 1 it is called defensive. Both the banks stock move positive with market as their betas is positive. Similarly, both the banks stock returns are positively correlated with the return of the market which explains positive nature of the beta coefficient.

Similarly, in total risk of stock of the banks, participation of systematic risk is greater in every banks stock. The systematic risk of the SCBNL is greater than that of NIBL whereas NIBL unsystematic risk is higher than SCBNL.

Chapter III

Summary, Conclusions and recommendations

3.1 Summary

Today's business age is a globalization and competitive age. Therefore, the business world of today is different from the past. The changing life style of people and their desires and membership in world Trade Organization (WTO) has also given more fluctuation and opportunities in the business. Due to development of sophisticated technology and different opportunity, today's business is more developing than the past. Investor are also very much aware how and where to invest their capital. So, no investors want to invest their capital on risky assets unless they are fully assured and confident that investment is safe for the future and yield required return. There are different types of investor with their nature. According to the risk bearing capacity some are risk seeking, some are risk averse and some may be neutral. Risk is the fact of life and return is reward for bearing risk. Risk plays a central role in the analysis of investment. Higher risk give higher return and the trade off between the two assumes a linear relationship between risk and return.

Risk and return are the important elements for an investment. Every investment involves full of uncertainties that make put future return in risky. A risk return trade off is related to preference f the investor. Risk can be thought of as possibility that the actual return from holding a security will deviate from the expected return. Hence, risk is inseparable from return.

At present 23 Commercial banks have been operating in Nepal. After government adopted liberal financial policy. Commercial banks and financial companies have increased in number. The no. of companies listed in NEPSE increased to 149 till FY 2007/08 and include seven month data in mid- February 2009. Among them 18 commercial bank are listed in the NEPSE.

The prime purpose of the study is to know risk and return of the listed commercial bank with reference to two commercial banks i.e. SCBNL and NIBL bank. This study is mainly based on Secondary data. The researcher had collected all the necessary data straight from the NEPSE, NRB, Concerned banks, SEBON and the internet. The study covers the period of seven years from the Fiscal year 2001/02 to 2007/08. The data have been analyzed by using financial tools and statistical tools like expected rate of return, S.D, C.V, Correlation Coefficient and Beta Coefficient etc. While analyzing risk and return brief review of related studies has performed. Scientific methods are used in data analysis and table graphs diagram are used and presented and interpreted the results.

Since the main objectives of this study is to know the risk and return of the selected banks, to find out the relationship between EPS and MPS of the selected commercial banks and measures systematic and unsystematic risk of the selected banks. The study is focused on the common stock of listed commercial banks i.e. SCBNL and NIBL. From the financial and statistical analysis of selected banks following are summarized and made conclusion as follows.

Findings and Conclusion

The expected return is an income received on stock investment which is usually expressed. Expected return on common stock of SCBNL is highest i.e. 0.7370 and Expected return of NIBL is lowest i.e. 0.6472 than SCBNL.

Risk is variability of return which has measured in terms of standard deviation of return. The shares with larger S.D seem to be able produce higher rates of return. Higher the will be return. However, the risk return characteristics do not seem to be the same for all the shares reviewed. In terms of risk, common stock of NIBL bank is most risky while SCBNL is less risky.

We know that C.V. is the best Statistical tools, which measures the risk per unit of return. In this study, SCBNL and NIBL C.V. are 0.7297 and 0.9025 respectively. This indicated that the security of NIBL has the highest C.V. i.e. 0.9025 and SCBNL has lowest C.V. i.e. 0.7297. So, SCBNL is the best common stock for investment.

S.D is only the measure of unsystematic risk which is not defined by market. Another major aspect to risk is systematic risk, which is defined by market and measured by beta coefficient. Beta explains the sensitivity or volatility of the stock with market. So, which stock has the higher beta, it shows that greater volatility and more sensitive of the stock with market. Greater the beta means more sensitivity of the stock with the market. If beta is greater than 1 then it is more volatile with the market and is called an aggressive asset. If beta is less than 1 the asset is called defensive asset and its price fluctuation are less volatile with the market.

In terms of beta coefficient, among the selected bank the SCBNL is aggressive stock or I think it risky stock which has beta coefficient higher than 1. The stock of SCBNL bank is the more volatile one i.e. 1.075. Similarly, the stock of the NIBL is defensive because it has beta less than 1.

3.3 Recommendations

Based on the analysis of data and major finding of this research following recommendations and suggestions have been prescribed.

The research is mainly focused on the risk and return of the listed commercial banks in NEPSE. From the analysis of individual securities, SCBNL shows the highest expected return i.e.0.7370. So, it is recommended for investors to invest on SCBNL's securities. In term of risk, the beta coefficient of NIBL's stock shows the less of 0.8611. However, its expected return is 0.6472. It shows hat NIBLis taking low risk and having low return. If the inventors want to bear a low risk then they can choose the NIBL's stock.

The coefficient of variation shows that the risk per unit of return and it provides a more meaningful basis for comparison. While considering the C.V. of commercial banks its is found that each company's per unit risk is much higher. Among them, NIBL has highest C.V. i.e. 0.9017 and SCBNL has the lowest C.V. i.e. 0.7279. This means that SCBNL has higher return and it's per unit risk is lower with compare to NIBL.

After partition of total risk into systematic risk and unsystematic risk, it is clearly seem that SCBNL is more risky in comparison to NIBL but it has low unsystematic risk. The systematic risk of NIBL is lower than SCBNL but it has high unsystematic risk. Hence, it seems that the stock can be diversified since unsystematic risk is controllable in nature therefore companies should try to minimize it by effective management. So, due to the undiversified nature of systematic risk investors should not always follow traditional system while buying common stock further they also need to concentrate on the related companies' unsystematic risk.

Under the investment performance evaluation, it is seen that SCBNL has the best investment opportunity than NIBL. Therefore, it would better if the investors invest in the bank, which has the best strategy and rank in the market. The investors should analyze all these matter.

The Nepalese investors are getting the required information from the companies where they have invested their money. Hence, concerned authorities should be liable to disseminate the required information to the public through appropriate means. Lack of timely rules and regulations investing in stock market have a negative impact in the investor. Therefore, authorized institutions as NEPSE and SEBON should disseminated such information through their journals and organized training programs and seminars to aware private and general investors regarding these rules and regulations. This is the time of information technology but NEPSE has still traded on open –cry system. The trading system of NEPSE should be modernized, reliable and effective information channel should be launched. Data available in the website should be up-to-data and developed online trading system. As a main body to regulate and developed capital market, SEBON needs to take quick action.