CHAPTER ONE

Introduction

1.1 Background of the study

Generally, the bank refers to those institutions which are established under law for dealing with
monetary transaction. It means those institutions are treated as banks which accept the deposit of
public and grant loan to the needy person or business. Men or industrialists against security
deposit. A bank can generate re-venue in a variety of different ways including interest,
transaction fees and financial advice.

Different economists have given definitions of bank. Definitions given by popular economists
are given below.

According to HL Hart, “A bank is one who in the ordinary course of his business receives money
which he pays by honoring cheque of persons from whom or whose account receives.”

The word ‘Bank’ is derived from Italian word ‘Banco’ which means a bench. In the past, the
ancestor of modern banking system that were merchants, goldsmith and money lenders use to
perform the monetary task sitting on the bench not in the market so, ‘Banco’ was used to denote
monetary transactions.

The Bank has gone through the various phases of its growth trajectory over a short period of its
existence. Growth of Prabhu Bank was phenomenal, especially after merger of Grand Bank
Nepal Limited, Kist Bank Ltd, Prabhu Bikash Bank Ltd, Gaurishankar Development Bank Ltd
and Zenith Finance Ltd in, 2016, attaining the status of “A” class financial institution licensed
and regulated by the central bank of Nepal, Nepal Rastra Bank.

As the leading banking and financial services group in Nepal, the Bank will be there where
growth is, connecting customers to the opportunities, enabling business to thrive and economies
to prosper and ultimately helping people to fulfill their hopes and realize their ambitions. The
Bank offers the full range of banking and investment services for personal and corporate
customers, backed by the team of highly motivated, young and dynamic professionals.

One of the bank’s primary objectives is to reach out to the common people with a host of helpful
products and services that will assure their future prosperity. Over a very short period of time,
the bank has achieved a significant degree of success in executing this objective thereby creating
a substantial base of loyal customers.

While ensuring adequate finance is a vital part in the setting up and running of any business, it
alone does not guarantee success. Success depends on the other factors such as quality
consultation and counseling. So the bank has given due priority in developing human resources
capable enough to understand the need of customer and meet their requirements. The bank keeps
its customer at the center of all it does. Prabhu Bank believes that a bank is only successful when
its customers are successful.

1.2 Statement of the Problems

Most of the commercial banks invest their resources in the limited area to achieve the highest
amount of profit. Under the prevailing economic situation in the country, the financial
investment is insignificant particularly in agriculture, industrial and other productive sectors
which is quite unsatisfactory to meet the economic growth of the present period. They hesitate to
invest in the long term projects and intend to adopt conservative loan policy. Investors couldn’t
get enough informational related to risk return and as well as portfolio analysis of investing
sectors.

After the emerged of NEPSE in 1993 A.D., it keeps them in dilemma, whether they should
invest in the stock or not and all this conditions make them not to utilize their funds as a result
investors have no much more alternatives for investments. Therefore, everyone is making
investment in security market. Only few companies are listed in NEPSE, which still limits the
opportunities of investment. This trend makes the market imbalance and unfair. If any banks will
issue shares there is become huge demand rather than supply but if any manufacturing and
processing companies will issue shares very little investors make investment.

Based on above discussion on the research problems, this study will deal with following issues.

a. Would portfolio constructions between different banks be profitable?

b. To what extend the systematic risk is related to total risk?
c. How do people know about the magnitude of risk inherent in individual stock and its
relationship with market?
d. Does the effect exist on the investment decision in total earnings of commercial banks?
e. How caninvestors create optimum risky portfolio?

1.3. Objectives of the study

This study has undertaken to focus on risk and return analysis of financial securities like
common stock of commercial banks of Nepal, Prabhu bank limited. So, the major objectives of
this study are as listed below:
a. To examine the risk and return of common stock investment.
b. To identify the covariance, correlation between the returns of commercial banks.
c. To examine the optimal portfolio risk and return of selected banks.
d. To identity the proportion of systematic risk and unsystematic risk of a common stock.