Risk and Return Performance: A case of selected Non-Banking Financial Companies.

Author: Milind Tiwari Co-author: Prof Rajani Ramdas(MBA, PGDBA) Abstract The NBFC sector in the recent times has experienced a lot of fluctuations in the share prices due to a variety of reasons; most prominent among them is being the amendments being made in the Banking Regulations Act and steps being taken by Reserve Bank of India towards the NBFC sector. The Non Banking Finance Company provides banking services without meeting the legal definition of a bank. The aim of the study is to see the volatility of stocks in the NBFC sector and to see the returns in respect to the risk taken. As a result 10 non banking financial companies has been selected for the study such as Bajaj Auto Finance Ltd., Mahindra and Mahindra Financial Services Ltd. , Housing Development Finance Corporation Ltd. ,Aditya Birla Money Ltd. , Apollo Finvest(India) ltd. , Geojit BNP Paribas Financial Services Ltd. , and so on. Overall, the results of this study indicate that, there exists significant relationship among risk return and volume. Key words: NBFC, volatility, risk, return.

Objectives To find out the volatility in the stock prices of 10 NBFCS for a period of 2 years. To see the risk- return tradeoff between the stocks of the companies in the NBFC sector.

Introduction The principle that potential return rises with an increase in risk. Low levels of uncertainty (lowrisk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. The present study focuses on the volatility in stock prices of companies in the non banking finance sector. MMFSL is one of the largest NBFCs of the country which caters to the need of

rural people of the country. The research takes into account the share prices of MMFSL and some other top NBFCs for two years and tries to analyze the risk-return trade off in the share prices. A large number of studies have focused to investigate the relation of risk-return-volume in financial markets which are emerging. Poterba, M. J., & Summers, L. H.(1987) examines the potential influence of changing stock market volatility on the level of stock market prices. The finding that volatility is not highly serially correlated is puzzling in light of Black's (1976) observation that stock market returns and changes in volatility are negatively correlated. The article is divided into five sections. The first clarifies the theoretical relationship between return volatility, the level of share prices, and required rates of return. The second section examines the time series properties of stock market volatility as measured using both monthly and daily data. The results suggest that although volatility is serially correlated, changes in current volatility should have only a negligible impact on volatility forecasts over intervals as short as one or two years. The third and fourth sections use data on the implied volatilities in option premia to reexamine the persistence question, and again find evidence of only weak serial correlation. The conclusion discusses the implications of results for alternative explanations of recent stock market movements and for our understanding of the sources of asset price fluctuations more generally.
Batra, A.(2004) about the time variation in the volatility of Indian stocks. In an overall sense,

therefore, the aim of the article wasn to give economic significance to changes in the pattern of stock market volatility in India during 1979-2003. Shafran, S., & Benizon, U.(2007) examines the behavior of investors when buying and selling stocks. In a series of experiments, subjects were asked to allocate a given endowment among six assets. Descriptive analysis was done in the study. All the assets had the same normal distribution with positive mean. The results show no disposition effect in the simple case with no restrictions. A reverse disposition effect was found in case 2, where subjects were required to hold only three assets and change one asset on each round. However, when subjects received information on the market return each period, they showed disposition effect when gain and losses are measured relatively to the market.

Dufeee, G. T examines the conditional covariance between aggregate stock returns and aggregate consumption growth substantially over time. When stock market wealth is high relative to consumption, both the conditional covariance and correlation are high. This variation was tested using asset-pricing models in which the price of consumption risk varies. After accounting for variations in this price, the relation between expected excess stock returns and the conditional covariance is negative. Harris, L. (1980) examines the S&P 500 stock return volatilities when compared to the volatilities of a matched set of stocks, after controlling for cross-sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983- before the start of trade in index futures and index options. Since then, S&P 500 stocks have been relatively more volatile. The difference is statistically, but not economically, significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trade could be responsible for the small increase in volatility. Rehman, U.A., Burhan, M., Mustaq, R., & Shah, A.Z.S.(2012)shows that the stock returns are related to the risk associated with it. There are two types of risk, namely, systematic and unsystematic. Systematic risk is the risk that is not in the control of the organization. And it is the systematic risk that has an empirical relationship with the stock returns. The risk-return is also interrelated with the trading volume. They are directly proportional to each other. Karthikeyen, P.(2011) talks about the stocks of selected companies from different sectors like Information Technology, Automobiles, Banking, Pharmaceuticals, and Oil Sectors in the form of their risk, return and liquidity. It discusses the trade-off using beta and standard deviations, coefficient of correlation tools and provides a method for quantifying risk. Kiran, C.(2010) describes an investigation of the relationship between return and risk on the stocks of the Nepal Stock Exchange Ltd. (NEPSE), applying cross-sectional regression with a new modified version of the conventional two-step method and using eleven years of monthly data with capital adjustment for elements such as dividends, bonus issues and right issues. The empirical finding shows that the CAPM does not provide a significantly positive relationship between common stock risk and return on the NEPALSE for the total sample period from 1998 to 2008.

Nanda, M.(2012)examines the risk-return characteristics of the Chinese A and H B-shares from domestic and foreign investors perspective over the period January 1995 to June 2012. On average, H B-shares appear to offer a better risk-adjusted return irrespective of whether the returns are measured in the Chinese Yuan (domestic perspective) or in the US dollar (foreign perspective) terms. However, a timeline analysis indicates that the relative advantage arising from investment in H B-shares may be nearing the end. This finding appears to be a consequence of investment schemes (such as opening of B shares to domestic investors, QFIIs and QDIIs) which allow domestic and foreign investors to cross each others territories specified at the begging of the opening up of the Chinese market to foreign investors. Second, there is some evidence of exchange rate advantage for foreign investors, but almost negligible. This finding may indicate that any extra benefit generated by slight (average annual) appreciation of Yuan against the dollar is offset by extra volatility of returns measured in the US dollar. Brown, C.T,. Harlow, W.V., & Tinic, M.S.(1993)aims at empirical evidence demonstrating that risk and expected returns of common stocks typically change in the aftermath of large price movements. When temporary changes in uncertainty follow major financial events, subsequent stock returns should be positively correlated with the shift in return volatility. This article mainly concentrates on the external sources of risk. Data and methodology. The investigation of risk return relationship is classified as causal research based on empirical evidence, conducted by using daily data of 10 non banking financial institutions in the Bombay stock exchange for the span of 2 years. For an assessment of risk-return-volume relationship a sample of 10 companies has been selected, the 2 years daily data (Jan 2010 to Dec 2012) has been obtain for this purpose. The stock prices of the companies collected from the business recorder website while the data of index was gathered from money control website. The return is represented by the mean and the risk is represented by the standard deviation. through the return series standard deviation was computed. Correlation analysis is done to find out the risk return trade off among the 10 companies.

Data analysis and results. Table-1: Risk and Return Performance of selected Non-Banking Financial Companies TATA RELG REL MM 0.0004 0.0007 0.0006 0.0007 Mean 01 84 92 60 0.0140 0.0139 0.0300 0.0198 Std. Dev. 95 55 19 63 1.0963 2.1247 0.3422 0.4023 Skewness 48 46 73 41 12.741 15.628 5.5975 5.0695 Kurtosis 38 54 23 68 Observati ons 508 508 508 508 GEO BJ AP 7.37E- 0.0002 0.0005 0.0002 0.0050 05 55 94 32 49 0.0300 0.0162 0.0224 0.0145 0.1068 94 88 25 37 48 0.5288 0.0226 0.7523 0.0848 19.360 73 41 16 54 64 8.2092 3.5638 6.2750 4.8144 415.18 61 01 25 51 44 508 508 508 508 508 INF HDFC AB 0.0069 59 0.1358 27 20.374 62 444.74 69 508

Table.1 presents the information regarding the risk and returns of the selected companies in the non-banking finance sector. The return is represented by the mean and the risk is represented by the standard deviation. The returns as interpreted through the table suggests that stock of companies such as Mahindra Finance, India Info line, Bajaj Capital exhibits good returns which is seen by the positive returns given by them. Though, the returns by stocks of companies such as Tata Capital, Apollo Finevest yield negative returns which as suggested by the table.

Table-2: Risk and Return trade-off of selected Non-Banking Financial Companies Name of the Stocks Aditya birla finance Apollo Finvest(India) Bajaj holdings and investment Geojit BNP paribas financial services Housing development and finance corporation India Infoline Risk-Return Relation -0.5989 Inference Negative

-0.6389 0.6320 -0.6449

Negative Positive Negative

0.7985

Positive

0.6525

Positive

Mahindra finance Reliance capital Tata capital Religare enterprises

0.6901 -0.5144 -0. 7255 -0.5651

Positive Negative Negative Negative

The table presents the correlation analysis between two variables, that is, mean and standard deviation. The table gives an overview about the risk return trade off that is present in the stocks of the companies in the NBFC sector. The companies such as Mahindra Finance, HDFC, India Info Line have positive correlation, that is, the risk and return represented by mean and standard deviation respectively move in the same direction. So to earn higher return higher risk will be taken. Similarly, stocks of companies such as Tata Capital, Adita Birla Holdings and Investments have negative correlation.

Conclusion
In this paper the relationship between risk and return is empirically tested. The sample of 10 non banking financial institutions listed companies on Bombay stock Exchange was taken. Correlation analysis was used to find the relationship between risk return and volume. On the basis of our empirical analysis we can conclude that there is a statistically significant relationship between risk and return. The results suggest that there exist a positive correlation among companies such as Mahindra Finance, HDFC, India Info Line, that is, the risk and return represented by mean and standard deviation respectively move in the same direction. So to earn higher return higher risk will be taken. Similarly, stocks of companies such as Tata Capital, Adita Birla Holdings and Investments have negative correlation that is, the risk and return represented by mean and standard deviation respectively move in the opposite direction.

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