RISK AND RETUN ANALYSIS
Return on investment is the profit expressed as a percentage of the initial investment. Profit
includes income and capital gains. Risk is the possibility that your investment will lose
money. The right balance between risk and return needs to be sought for secured gains.
(i) STOCK RETURN VALUE
Total Stock Return = [ (P1 – P0) + D ] / P0
The formula for the total stock return is the appreciation in the price plus any dividends
paid, divided by the original price of the stock. The income sources from a stock is
dividends and its increase in value. The first portion of the numerator of the total stock
return formula looks at how much the value has increased (P1 - P0). The denominator of
the formula to calculate a stock's total return is the original price of the stock which is used
due to being the original amount invested.
The stock return for latest three financial years is calculated as follows,
April, 2016 to March, 2017: -
Stock price on April, 2016 (P0) = 96.35
Stock price on March, 2017 (P1) = 195.05
Dividend per share = 1.10
Stock return value = (195.05 - 96.35) + 1.10 / 96.35 = 1.0358
The total stock return for the FY 17 in percentage 103.58%
April, 2017 to March, 2018: -
Stock price on April, 2017 (P0) = 199.35
Stock price on March, 2018 (P1) = 214.55
Dividend per share = 1.20
Stock return value = (214.55 - 199.35) + 1.20 / 199.35 = 0.0822
The total stock return for the FY 18 in percentage 8.22%
April, 2018 to March, 2019: -
Stock price on April, 2018 (P0) = 235.65
Stock price on March, 2019 (P1) = 205.50
Dividend per share = 1.20
Stock return value = (205.50 - 235.65) + 1.20 /235.65 = - 0.1228
The total stock return for the FY 18 in percentage - 12.28%
(ii) BETA VALUE: -
Beta describes the activity of a security's returns responding to swings in the market. The
beta calculation is used to help investors understand whether a stock moves in the same
direction as the rest of the market, and how volatile or risky it is compared to the market.
For beta to provide any insight, the “market” used as a benchmark should be related to the
stock. If a stock has a beta of 1.0, it indicates that its price activity is strongly correlated
with the market.
The beta value for Hindalco’s stocks are calculated using covariance method using the
data of past three years. Here NSE 500 is used for calculation of market value.
Beta = Covariance (Hindalco's daily % change, NSE 500 daily % change)
Variance (NSE 500 daily % change)
= 0.95071 / 0.582114
= 1.63
A beta value of less than 1.0 means that the security is theoretically less volatile than the
market, meaning the portfolio is less risky with the stock included than without it. A beta
that is greater than 1.0 indicates that the security's price is theoretically more volatile than
the market.
The limitation of beta statistic is that since it’s calculated using historical data points, it
becomes less meaningful for investors looking to predict a stock's future movements.
(iii) STOCK RISK VALUE
Equity market risks can be of two types, systematic and unsystematic risks. The source
of systematic risks is the market or global factors like oil prices, currency movements,
government changes, etc. Unsystematic risks are unique to the company or an industry
like management and labor relations, increased competition, company products, etc.
The total risk of investing in the company’s stocks can be derived by calculating the
standard deviation in the percentage changes of the stocks.
Hence, the total risk in Hindalco’s stock is 2.28%.
The market or systematic risk is calculated as, beta*standard deviation in the market
(NSE 500) which is, 1.63*0.76 = 1.24%.
Hence the internal or unsystematic risk would be, total risk – market risk, resulting as,
2.28% – 1.24% = 1.04%.
