Volume: 9, Issue: 1
ABSTRACT
The general perception among the investor is that stock market gives maximum return at high risk. Investors are concerned about the value of capital market index while investing in stock market. Investor behavior is related to the psychological factor which reveals that prices of stocks and market movements are closely related to each other. Investors think that value of their stock prices move in the same direction for any increase or decrease in the value of index. If investors are extremely bullish on the market, will focus on high beta stocks in order to leverage expected strong market conditions. The risk associated with this is known as systematic risk which explains the propensity of stock price movements with respect to change in market index. eta ( ) measures the systematic risk. Stocks with the > 1are more volatile than the index and are classified as aggressive stocks. Stocks with less than 1 are less volatile and classified as defensive stocks. Here the ratio of standard deviations measure how variable the stock return is relative to the variability of the market return. The correlation coefficient measures the nature and extent of relationship. If value of 'r' is not a big number, then eta would have little meaning which indicates mutual relation between the stock and market return is weak. The strength of the relationship is determined by coefficient of determination. R2 gives the proportion of variation in dependent variable (stock return) that is explained by the independent variable (market return). eta with lower value of R2 suggests that eta is of little use in explaining the movements in stock return as some other factors may be affecting the variation other than market return. Hence we can use R2 as a measure of degree of reliability of beta in prediction line. This study helps to understand whether degree of reliability of eta coefficients for aggressive stocks is significantly higher than defensive stocks.
