Risk and Return Analysis on Common Stock Investment of Commercial Banks in Nepal (With Reference to NIBL and NABIL)

Abstract

Common Stock is a security that represents ownership in a corporation. It is a type of equity share issued by a corporation or entity. The buyers of common stock are referred to as shareholders. Common Stocks are fractional shares or a percentage equity ownership of an entity. A share represents a proportional stake in the company’s net worth, income, cash flow, dividend, etc. Shareholder privileges usually include voting rights on issue that require shareholder approval and electing the directors of the entity. The main objective of the study is to access the risk and return on common stock investment of listed commercial bank. The specific objectives of the study are as follows: (i) To analyze the common stock in term of risk and return. (ii) To examine the sensitivity of the stock price of commercial paper. (iii) To identify whether stock of the selected bank is overpriced, under priced and equilibrium price. (iv) To identify optimum portfolio of the bank. (v) To study the risk and return of the sampled commercial banks and also analyze their coefficient of variation. An investment is a sacrifice of the current money or other resources for future benefits. Numerous of investment opportunities available today. A good investment policy has positive impact on the economic development of the nation and the investor too but some of the sources of uncertainty that contribute to the investment risk are interest rate risk, market risk, default risk and industry risk. As an investor everyone has a wide area of the investment on the common stock of banking sector. Common stock represents the ownership position in the corporation. The study made on risk and return analysis on common stock of listed commercial banks is based on primary as well as secondary data from fiscal years 2013/014 to 2017/018. In this study, expected rate of return of NABIL bank’s stock is highest i.e. 0.3408. Likewise in the terms of standard deviation NABIL bank’s stock is highest risk i.e. 0.8222. But generally standard deviation is not used to determining risk, as there may be different expected return. Therefore, the coefficient of variation is considered as the best tools to measure the risk. On the other hand, it is found that the required rate of return of all sample banks have lower than it’s expected rate of return. It means that all sampled bank’s stock price are underpriced.