Risk and Return Analysis on Common Stock of Commercial Banks of Nepal

Abstract

Risk and return analysis plays a key role in decision making process. Every investors wants to avoid risk and maximize return. The relationship between risk and return is described by investor’s perception about risk and their demand for compensation. No investor will like to invest in risky assets unless he is assured of adequate compensation for the assumption of risk. This research analyzes the risk and return on common stock of Nepalese stock market. This study is based on secondary data of 5 commercial banks for the period of 2014/15 to 2018/19. Data and information has been collected from annual report of selected commercial banks. The research design adopted in this study is descriptive and analytical research design. Expected return, required return, CAPM model and statistical models like mean, standard deviation, coefficient of variance, covariance, correlation and beta are calculated and analyzed. The data gathered for this purpose are presented in tables and graphs. The descriptive statistics for commercial bank shows that the standard deviation of NIBL, GIME, NSBI, NIBL and NBBL are 30.79%, 28.97%, 54.22%, 63.66% and 74.37% respectively. The expected return of NIBL, GIME, NSBI, NIBL and NBBL are 1.96%, (3.31)%, 0.55%, 7.50% and 16.57% respectively. After the analysis of risk and return of sample banks, it is concluded that all the commercial banks are very risky with fluctuated rate of return. Similarly, required rate of return is greater than expected rate of return. Thus, the stock of sample bank is overpriced. This analysis reveals that the overpriced stock value will decrease in the future providing the investors lower return and it’s better to sell these stocks. Systematic and unsystematic risk has been calculated in which systematic risk is higher. Systematic risk cannot be diversified where as unsystematic risk can diversified and minimized through creation of portfolio. Similarly, correlation coefficient between EBL & NSBI, NSBI & EBBL, GIME & NIBL are 0.93, 0.53 and 0.75 respectively which is less than 1. This reveals that there is positive correlation i.e.

<1 between sample banks. It shows that there is no any beneficiary to make the portfolio combination between the sample banks even if portfolio combination has somehow able to diversify or reduce risk.