Introduction

CHAPTER 1
INTRODUCTION

The financial system is the system that allows the transfer of money between savers
(and investors) and borrowers. A financial system can operate on a global, regional or firm
specific level. The financial system includes stock market. A stock market, or equity market,
is a private or public market for the trading of company stock and derivatives of company
stock at an agreed price; these are securities listed on a stock exchange as well as those only
traded privately. The word 'Blue chip stock' refers to the equity in the securities of high
quality companies. Blue chip stock is often also high in public share price. A blue chip stock
is the nickname for a stock that is thought to be a relatively safe investment.
Blue chip stock is a term named after the blue-coloured highest poker chip
denomination. Stock of "blue chips" or "blue chip stock demonstrates some combination of
high credit rating, strong balance sheet, stable earnings power.
A blue chip stock usually has a diversified revenue base. Most Dow Jones Industrial
Average (DJIA) companies fall into the category of blue chip stock. Blue chip stock is not
limited to the thirty stocks in the Dow, blue chip can imply any publicly traded stock in a
leading international company listed in a foreign stock market. Blue chip stock is often found
in conservative investors and retirement portfolios. Volatility for blue chip stock is typically
lower than that of lesser known, more thinly traded stocks. Blue chip stock is often popular in
market downturns for their ability to pay dividends no matter what the economic climate.
1.1 IMPORTANCE OF THE STUDY
Efficient Market Hypothesis (EMH), an investment theory states it is impossible to
"beat the market" because stock market efficiency causes existing share prices to always
incorporate and reflect all relevant information. According to the EMH, stocks always trade
at their fair value on stock exchanges, making it impossible for investors to either purchase
undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to
outperform the overall market through expert stock selection or market timing, and that the
only way an investor can possibly obtain higher returns is by purchasing riskier investments.
According to the EMH, only change in fundamental factors, such as profits or dividends,
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ought to affect share prices. But this theoretic academic viewpoint also predicts that little or
no trading should take place-contrary to fact, since prices are already at or near equilibrium,
having priced in all public knowledge. But the efficient market hypothesis is sorely tested by
such events as the stock market crash in 1987, when the Down Jones index plummeted
22.6%- the largest ever one day fall in the United States. This event demonstrated that share
price can fall dramatically even though, to this day, it is impossible to fix a definite cause: a
thorough search failed to detect any specific or unexpected development that might account
for the crash. It also seems to be the case more generally that many price movements are not
occasioned by new information: a study of the fifty largest one-day share price movements in
the United States in the post war period confirms this. Moreover, while the EMH predicts that
all price movements (in the absence of change in the fundamental information) is random
(i.e., non-trending). Many studies have shown a market tendency for the stock market to
trend over time periods of weaker or longer.
In finance, volatility is a measure for variation of price of a financial instrument over
time. The symbol is used for volatility, and corresponds to standard deviation. Volatility as
described here refers to the actual current volatility of a financial instrument for a specified
period (for example 30 days or 90 days). It is the volatility of a financial instrument based on
historical prices over the specified period with the last observation of the most recent price.
The study on volatility of Blue-chip shares will give an exposure to different share market
operations and also a detailed description regarding mutual fund. The study will provide
informations regarding historical volatility occurred in the Blue-chip shares and trends
associated with it. Through this study, an investor also gets a detailed idea about the risk
associated with Blue-chip shares and the amount of return related with each share. This
phrase is used particularly when it is wish to distinguish between the actual current volatility
of an instrument and actual historical volatility. Actual current volatility refers to the volatility
of a financial instrument over a specified period but with the last observation on a date in the
past. Actual future volatility refers to the volatility of a financial instrument over a specified
period starting at the current time and ending at a future date (normally the expiry date of an
option). Historical volatility implied volatility refers to the implied volatility observed from
historical prices of the financial instrument (normally options).
From experience we know that investors may temporarily full financial prices away
from their long term trend level. Over reactions may occur so that excessive optimism may
drive prices unduly high or excessive pessimism may drive prices unduly low. Now
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Introduction
theoretical and empirical arguments have been put forward against the notion that financial
markets are efficient.
1.2 NEED AND SIGNIFICANCE OF THE STUDY
Financial research can be a systematic and organized effort to investigate into a
problem encountered in the investment scenario. It comprises a series of theoretical concepts
designed and executed, with the goal of finding answers to the issues that are of concern to
the manager and the work environment. The first step in the process is to identify the problem
areas that exist in the selection of securities. Once the problem is clearly identified the next
step is to gather information analyze the data, and determine the factors that are associated
with the problem and solve it by taking necessary corrective actions. The entire process by
which we attempt to solve the problem is called research. Thus research involves a series of
well thought out and carefully executed actions that will enable the manager to know how
organizational problems can be solved. Research thus encompasses the process of enquiry,
investigation, examination and experimentation. These processes are to be carried out
critically, objectively, and logically.
Empirical evidences in research have shown that psychological factors may result in
exaggerated stock price movements. Psychological research has demonstrated that people are
pre -disposed to seeing patterns, and often perceives a pattern in what is, in fact, just noise. In
the present context, this implies that a succession of good news items about a company may
lead investors to overact positively. A period of good returns also boosts the investors selfconfidence, reducing his risk threshold.
Another phenomenon from psychology that works against an objective assessment is
group thinking. As social animals, it is not easy to stick to an opinion that differs markedly
from that of a majority of the group. An example with which one may be familiar is the
reluctance to enter a resturant that is empty: people generally prefer to have their opinion
validated by those of other in the group. The stock market, as with any other business, is quite
unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they
need. In the period running up to the 1987 crash, less than 1 per cent of the analyst's
recommendations had been to sell (and even during the 20002002 bear market, the average
did not rise above 5 %). In the run up to 2000, the media amplified the general euphoria, with
reports of rapidly rising share prices and the notion that large sums of money could be

Introduction
quickly earned in the so-called new economy stock market and later amplified the gloom
which descended during the 20002002 bear market, so that by summer of 2002, predictions
of a DOW average below 5000 were quite common. In normal times the market behaves like
a game of roulette; the probabilities are known and largely independent of the investment
decision of the different players. In times of market stress, however, the game becomes more
like poker (herding behaviour takes over). The players must now give heavy weight to the
psychology of other investors and how they are likely to react psychologically.
In these circumstances, the investigator felt it inevitable to find out the reasons for the
price volatility of the stock market and reasons for inadequate yield or return in detail. The
literature and studies reviewed also do not include such an exhaustive study. The investors
are to be sensitised about the need for continuing stock trading as the states progress largely
depends on active trading and investment in growth firms. In this regard the following
research problems were highlighted.
1. How investors can evaluate the volatility in blue chip shares?
2. What is the current status of growth and decline in return of selected blue chip
shares?
3. Does there exists any association between stock prices and market index?
4. How can return of selected blue chip shares be compared simultaneously?
A detailed study on the problems and potentialities of stock market, price prediction
related techniques and fruitful suggestions for making this stock trading assumes great
importance for regaining the interest of investors in stock market. Hence, the investigator
selected the study.
1.3 STATEMENT OF THE PROBLEM
The vulnerable and unpredictable nature of the stock market, stock index and price
prediction related techniques needs urgent attention. A stock index or stock market index is a
measurement of the value of a section of the stock market. It is computed from the prices of
selected stocks (typically a weighted average). It is a tool used by investors and financial
managers to describe the market, and to compare the return on specific investments. Due to
high relative changes in the market on account of various intrinsic and extrinsic parameters,
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Introduction
make the prediction more complex and risky. The actual reasons behind this state of affairs
can only be aptly described by the facts and figures available. A worthwhile study can only be
undertaken through a detailed analysis is of utmost importance in formulating strategies to
overcome the crisis felt by investors. The present study is designed to meet this end making
with stock market as subjects of investigation. The study is entitled:
PRICE VOLATILITY OF SELECTED BLUECHIP SHARES AND BEHAVIOUR OF
STOCK MARKET INDEX.
1.4 OBJECTIVES OF THE STUDY
1)

To evaluate the price volatility of selected blue chip shares.

2) To study the growth and decline of return of blue chip shares.
3) To evaluate association between stock prices and market index.
4) To examine the return of selected blue chip shares

1.5 HYPOTHESES OF THE STUDY

Keeping in view the above objectives of the study, it is proposed to formulate
certain hypotheses and test them by making use of the relevant data. The following are the
hypotheses formulated for the study:
1.

The trend in price volatility of selected blue chip shares is encouraging.

2.

There is no significant difference in the growth and decline of return of blue chip
shares.

3.

There is no disparity between stock prices and market index.

4.

The return of selected blue chip shares is the same.

1.6 METHODOLOGY OF THE STUDY

Method Adopted

Introduction
The project is designed as analytical in nature to know and familiarize with blue chip
and other shares to Indian investors and its related implications in the share market. Research
methods and techniques that are found suitable are used for conducting this research. It
helped in arriving at solutions by analyzing and relating available data with unknown aspects
of the problem. The purpose of the present investigation is to study the price volatility of
selected blue-chip shares and behaviour of stock market index. The present study purely
relied on secondary data.

The secondary data are collected mainly from the relevant

websites, Department of Economics and Statistics, published and unpublished reports,

documents, articles, working papers, published and unpublished research dissertations.
The sample stock selected for the present study are BHARATI AIRTEL LTD , BPCL,
ICICI, INFOSYS, IOC, MARUTHI, SBI, TATA MOTORS AND TCS. The data for the study
covers a period of 30/6/2009 to 31/3/2014. Since the above companies are market leaders in
their business and shares of such companies are well rated, hence considered to be blue-chip
companies. The data for the present study was taken from the official site of Bombay Stock
Exchange.
Period of Reference
A 4 year and 9 months period from 30/6/2009 to 31/3/2014 has been selected for the
present study. However, data pertaining to preceding years were also been incorporated in
the appropriate places wherever found necessary to make the study more precise and perfect
as possible.
1.7 Statistical Techniques Used
The following are the statistical techniques employed for the present study:
1. Trend analysis to examine the future trend in price of selected stock.
2. Carl Pearsons correlation coefficient to find out whether there is any significant
relationship in the shares with index.
3. Single Classification Analysis of Variance (ANOVA) to find out whether there is any
significant difference among the price changes over the period.

Introduction
The statistical analysis was done with the help of computer using appropriate
software.

1.8 SCOPE OF THE STUDY

The study on volatility of blue chip shares will give an exposure to different share
market operations and also a detailed description regarding blue chip shares. The study will
provide informations regarding historical volatility occurred in the blue chip shares and
trends associated with each. Through this study an investor also gets a detailed idea about the
risk associated with blue chip shares and amount of return related with each share.
1.9 LIMITATIONS OF THE STUDY
Though all possible steps were taken to make the study a generalizable and reliable
one, a few limitations have crept into the study, which are listed below:

As the time allotted for the study was short ,it became difficult to gather all technical
information of production process

The study was mainly based on secondary data ,and so it is subject to the limitations
of the same
It is hoped that the findings of the study are valid and generalisable to a great extent, and

it is also hoped that the results of the study would be helpful to administrators / policy makers
as well as investors in developing constructive programmes which aim at regaining the past
glory of share market.
1.10 SCHEME OF REPORTING
CHAPTER -1
Chapter 1 includes an overall introduction about the study. It includes background of the
problem, introduction to company, objective of study , research methodology, period of study
, data collection method, research design, ,scope and limitation of the study.

Introduction
CHAPTER 2
Chapter 2 includes Literature review of the study. It aims to review the critical points of
current knowledge including substantive findings as well as theoretical and methodological
contributions to the particular topic.
CHAPTER 3
Chapter 3 deals with the brief outlook of share market of India and the profile of companies
selected.
CHAPTER 4
Chapter 4 covers data analysis and interpretation.
CHAPTER 5
Chapter 5 deals with the findings, conclusions and the suggestions made through the study