Research methodology may be defined as "a systematic process that is adopted by the researcher in studying problem with certain objective in view". In other words research methodology describes the method and the process applied in the entire aspects of the study focus of the data, data gathering instrument and procedures, data tabulating and processing and method's of analysis.
Research methodology refers to the various technical steps to be adopted by researcher in studying problem with certain object in view (Kothari 1994, PG98). Research methodology describes the method, process, tools and technique used in analysis of data and preparation of the report. Research Methodology is the way of systematically solving the research problem. It is careful investigation especially through search of new fact in any branch for knowledge the appropriate research methodology. It is followed to achieve the basic objective and goals of this research.
The basic objective of this study is to analyze the risk and return of the five commercial bank namely, Himalayan Bank Limited, Standard Chartered Nepal Bank Limited, Nepal Investment bank Limited, Bank Of Kathmandu Limited and Nepal Bangladesh Bank Limited.
The content refers to the approach of the research process from theoretically foundation to the collection and analysis of the data. As most of the data are quantitative study is based on scientific models. It is the compilation of the technique aspect and logical aspect on the basis of secondary data
OBJECTIVE OF THE STUDY
The major objective of the study is to assess the risk associated with return on common stocks of the Nepalese commercial banks on the basis of selected financial tools. The specific objectives of the study are as follows:
To describe the risk, return and other relevant variables that directly affect the investment in common stock.
To evaluate the common stock of the listed commercial banks of market capitalization.
To determine whether the shares of commercial banks are overpriced or under priced or at equilibrium price by analyzing risk and return characteristics of the individuals shares and stocks. To identify the correlation between returns of commercial banks.
SIGNIFICANE OF STUDY
Mostly the public companies obtain funds from the public investors through financial market. The long run objective of the every company is to maximize share holders wealth position whereas the investors seek to get good return in future.
In Nepalese context there lacks wider investment opportunities which provide good rate of return. So there has been huge amount of unutilized saving funds with general public. Increasing trend of market price per share (MPS) of public companies, mainly joint venture commercial banks attracts the investors. Therefore they are investing their saving funds in common stocks of public companies with the good expectation of higher capital gain in future. But there seems very least consequences about the real financial condition of the company and degree of risk involve in their investments. The researchers has attempted to analyze the MPS of sample company with reference to their financial indicators and risk in common stock investment, which may probably provide real pictures of sampled companies to both the outstanding and potential investors in order to take proper investment decision. Similarly, this piece of task may work as guide for future researcher and concerned persons.
Further, this research will attempt to clarify pictures of different aspects of risk and return, which will be beneficial to the investors for taking right investment decision
LIMITATIONS OF THE STUDY
As every research has its own limitations this study is not biased. So this has some limitations which are listed below:
The study will be mainly based on secondary data. The data published in annual reports of the respective banks, articles, publication, journals etc will be taken into consideration. Any misrepresentation, mistakes, omission etc may affect the outcome to the study. Thus, the reality of study will depend on secondary sources of data and questionnaires filled and responses given by the respondents.
The study covers the relevant data and information only for last five years from 2008 to 2009
Altogether five commercial banks i.e. Himalayan Bank Limited (HBL), Standard Chartered Bank Nepal Limited (SCBNL), Nepal Investment Bank Limited (NIBL), Bank of Kathmandu (BOK) and Nepal Bangladesh Bank Limited (NBBL) have been taken into consideration for the purpose of study listed in NEPSE.
The study only focuses an analysis of risk and return associated with the common stock of selected company.
REVIEW OF LITERATURE
Reviews of literature about "risk and return analysis on common stocks" are presented in this chapter this chapter basically concerned with review of literature relevant to the risk and return management of different writer. Every study or research is very much based on past knowledge. The past knowledge or the previous study should not be ignored as it provides foundation to the present study. So the review of literature is the most necessary chapter. "the purpose of reviewing the literature is to develop some expertise in once area to see what new contribution can be made and to review some idea for developing research design" Wolff and Pant:1999,30
Review of literature is a basic requirement for any research work. Review of literature means reviewing research studies or other related proposition in related area of the study so that all the past studies, their conclusions and deficiencies may be known and further research can be conducted. The main reason for the full review of research of the past is to know the outcomes of those investigations in areas where similar concepts and methodologies had been used successfully. In this process, efforts has been made to examine and review some of the related books, articles published in different economic journals, bulletins, dissertation papers, magazines, newspapers, and websites .This study is divided into two parts, one is conceptual framework and another is review of previous study.
RESEARCH DESIGN
Research design is the plan structure and strategy of investigation conceived so as to obtain answers to the question and to collect variance (Kerlinger: 1986, Pg 275). The research design serves as a frame work for the study guiding the collection and analyzing of the data (Wolf and Pant: 2003, Pg 74). More Specify research design describes the general plan for collecting, analyzing and evaluating data after identifying
What the research wants to do?
What has to be deal with in order to obtain the required information
In order to conduct any type of research a well set research design is necessary, which fulfill the objective of the study. The research design of this study is descriptive as well as analytical for the purpose of descriptive analysis. The standard deviation and coefficient of variation has been computed to check whether the risk can be diversified for this analytical purpose, the annual report and financial statement of the relative financial institution were collected from the last five years.
NATURE AND SOURCES OF DATA
The research will be mainly based on application of portfolio theory and risk and return theory in financial institution of Nepal. To attain the objective of the study, secondary data have been used. The necessary data will be collected from the various sources covering a period 1999/2000 to 2008/2009. The data collection sources will be as follows:
Website of Nepal Stock Exchange Limited
The profit &Loss account and different balance sheet of the banks
Annual report of the Security Board Of Nepal
Other sources of data are financial reports, annual report, periodicals and other information provided by the institutions as well as business news and magazine
POPULATION AND SAMPLE
When some of the element are selected with the intention of finding out something about the population from which they are taken, that group of element is referred as a sample. This research study is based to find out the risk and return analysis on common stock in Nepalese commercial banks. In Nepal 18 Commercial bank exists in mid july 2009. Therefore population data is 18 and this research will be conducted with 5 Nepalese commercial bank Therefore sample data is
Nepal Bank Limited
Rastriya Banijaya Bank
NABIL Bank Limited
Nepal Investment Bank Limited
Standard Chartered Bank Limited
Himalayan Bank Limited
Nepal SBI Bank Limited
Nepal Bangladesh Bank Limited
Everest Bank Limited
Bank Of Kathmandu Bank Limited
Nepal Credit And Commerce Bank Limited
Nepal Industrial And Commerce Bank Limited
Laxmi Bank Limited
Machhapucchhere Bank Limited
Kumari Bank Limited
Lumbini Bank Limited
Siddhartha Bank Limited
Agriculture Bank Limited
SAMPLE DATA
Nepal Investment Bank Limited
Standard Chartered Bank Limited
Himalayan Bank Limited
Nepal Bangladesh Nepal Investment Bank Limited
Bank of Kathmandu limited
METHOD OF DATA ANALYSIS
The collected data are analyzed by using various financial tools as well as statistical tools, which are given and defined below
1. Financial tools
2. Statisticals tools
Financial Tools
Market Price per Stock (p)
One of the major data of this study is market price per stock, among high low and closing prices. Each year closing price has been taken as market price of the stock, which has specified time span of one year and the study has focused in annual basis. Closing price is used as market price of the stock
Market value in the secondary market is determined by the supply and demand factors and reflects the opinion of investors and traders concerning the value of the stock
Dividend (D)
Dividend is that part of earning that is distributed tie the share holders as a part of their investment. Dividend is the return to the equity capital that consists price of time and price of risk taking by the investors. The total amount of the dividend out of earning available to the shareholders, distributed the common stock's portion is called dividend per share (DPS). Symbolically expressing of DPS is given below
DPS= The total Amount of dividend paid
Number of common stocks outstanding
Dividend is relevant during computation of rate of return, which is a reward to the shareholders for their investment which can be given in different form for instance cash dividend and stock dividend etc. If company declares only cash dividend, there is no problem while taking the exact amount of dividend that is relevant. But if bonus share is issued, shareholders will receive extra number of share. Consequently for the price of dividend following model has been used through out
Total Dividend Amount= Cash Dividend + %Stock Dividend Χ Next year MPS
EARNING (E)
Earning refers to the net income after taxes of the company earning per share (EPS) is the result of net income after taxes if the dividend by the outstanding number of common stocks. Symbolically, EPS can be expressed as follows
EPS= Net Income after Taxes
Number of Common Stocks outstanding
RETURN OF COMMON STOCK INVESTMENT(R)
The return is the total gain or losses expressed on an investment over a given period of time. It is commonly measured as the change in values plus cash distribution during the period . Expressed as a percentage of beginning of period investment value. Symbolically, Return (R) can be expressed as
Kt = Pt-Pt-1 + Ct
Pt-1
Where:
Kt = actual, expected or required rate of return during period 't'.
Pt = price (value) of assets at time 't'
Pt-1 = price (value) of assets at time 't-1'
Ct = cash (flow) received from the assets investment in the time period 't-1' or 't'.
EXPECTED RETURN OF COMMON STOCKS E(Rj)
The study also aims to find out the expected return on the investment in common stocks. Usually this rate is obtained by Arithmetic mean of the past years return. Symbolically E(Rj) can be expressed as follows
E(Rj)=
Where, E(Rj) = expected rate of return on stock J.
∑ = Sign of summation
n = number of years that the return is taken.
STANDARD DEVIATION
This is a major of dispersion of forecast returns. When such returns approximate a normal probability distribution. It is a statistical concept and is widely used to measure risk from holding a single assets. The standard deviation is derived so that a high standard deviation represents a large dispersion of return and is a high risk and vice-versa.
It is a statistical measure of the variability of a distribution of return around its mean. It is a square root of the variation and measure the UN systematic risk of stock investment. Symbolically, '' can be expressed as follows:
=
Where, = standard deviation of return
= expected rate of return
COEFFICIENT OF VARIATION (CV)
The coefficient of variation, CV, is a measure of relative dispersion that is useful in comparing the risk of assets with different expected return. The higher the coefficient of variation the greater the risk. Symbolically CV can be expressed as follows:
Coefficient of Variation (C.V) = Ã- 100
Where, CV = Coefficient of Variation
= Standard deviation
= Expected rate of return
Thus, the coefficient of variation is a measure of relative dispersion (risk) which measure risk "per unit of expected return". The large the coefficient of variation, the larger the relative risk of investment. If a choice must be made between two investments which have the same expected rate of return but different standard deviation, most investors would choose the one with the lower standard deviation.
While consulting different books from different authors, it is found that large number of investors is of risk averter. They generally invest their investment in a portfolio. Investor rarely places their entire wealth into single assets rather they contract a portfolio or group of investment. Therefore it is need to extend analysis of risk and return to include portfolio. The expected rate of return on portfolio is simply the weighted being the fraction of the total portfolio invested in each assets.
PORTFOLIO RETURN (Rp)
Portfolio is the combination of two or more than two securities. In other words, the return on a portfolio is a weighted average of the returns on the individual assets, from which is formed. Symbolically, Rp can be expressed as follows
=
Where, = expected return on individual stock
= the weight of individual stock
n = total no of stock in portfolio
PORTFOLIO RISK
Portfolio risk is the measure of combined standard deviation of stocks held in portfolio with references to individual stock corresponding correlation contribution symbolically, portfolio risk can be expressed as follows:
=
Where,
= portfolio risk
= proportion of stock A held in portfolio
= proportion of stock B held in portfolio
= correlation between stocks
Where,
= Required rate of return on i security
= Expected return on market
= Risk free rate of return
= beta coefficient
BETA COEFFICIENT ():
The beta coefficient measures no diversification risk. It is an index of the degree of movement of an assets return in response to a change in the market return. An assets historical returns are used in finding the assets beta coefficient. The market return is the return on the market portfolio of all traded securities. The NEPSE stock composite index or some similar stock index is used as the market return. Although beta's for actively traded stocks can be obtained from a variety of sources.
Market sensitivity of stock is explained in terms of beta coefficient. Higher the beta greater the sensitivity and reaction to the market movement. Market beta serves as a bench mark or a measuring scale for the evaluation of risk of individual stocks. For an individual stock, the beta could be less than equal to or more than one depending upon the volatility of that stock return relative to market return. Symbolically,
=
where,
= covariance of the return on assets i and the market portfolio.
= variance of return on the market portfolio
= required rate of return on the market portfolio of securities
PORTFOLIO BETA (β):
The beta of a portfolio can be easily estimated by using the beta of the individual assets it includes. Symbolically,
β=
where,
β= portfolio beta coefficient
= proportion of the portfolios total rupees represented by assets i
= beta coefficient RISK MINIMIZING PORTFOLIO()
It is the proportion of stock that will minimize the possible unsystematic risk. Symbolically risk minimizing portfolio can be expressed as follows:
=
Where,
= weight or proportion of stock A that minimize the portfolio risk of stock A and B.
Note: = 1-
Method of Analysis and Presentation:
Methods of analysis applied are as simple as possible. Results are presented in tabular form and clear interpretation is made simultaneously. To make report simpler and easily understandable chart, diagram have been used.
CONCLUSION
Analysis of the risk and return is very important of the investment activities, which can be examined through the various ways. Current owners, potential investors, employees, creditors, government, customers are analyze the risk and return for their own interest. This study shows the risk and return of the sample companies.
Return is fundamental requirement of investment and a certain level of risk is attached with it. Saving is worthless until and unless used in productive investment. Finance mostly deals with monetary risk and return which is the most influencing heavy loss due to inadequate knowledge and information related to the stock investment. One expects favorable returns by holding stock. How can one make higher return assuming lower risk?
Since the main objective of the study is to analyze the risk and return of common stocks in Nepalese context. The Study is focused on the common stock of listed commercial banks. Thus listed five commercial banks are taken as sample to analyze the risk and return on common stock investment. While analyzing the risk and return, brief review of related studies has been performed. This analysis of risk and return is a significant in investment decision as well as managerial decision. It influences risk and return of the shareholders. Consequently the risk and return analysis influences the market price of stock. So before making an investment decision, a person must analyze the risk and return form particular stock as well as they can make a good risk minimizing portfolio between their investments in the stock.
However, different scholars have suggested various statistical as well as financial tools like required rate of return, expected rate of return, standard deviation, variance, coefficient of variation, beta coefficient, correlation coefficient, coefficient of determination, portfolio risk, portfolio return, least square regression equation and so on
