DISSERTATION REPORT

On

“CAN INDIVIDUAL INVESTOR BEAT THE MARKET?”

This dissertation report is being submitted as part of the requirements of the

MBA Programme of Bangalore University.

Submitted By

SUNEEL B. SHADISHYALI
Reg. No. 03VWCM6105

With the guidance and support of

Prof. S.P. Srinivasan

Faculty, Alliance Business Academy

ALLIANCE BUSINESS ACADEMY

BANGALORE – 560 076

Batch: 2003-2005
 CERTIFICATE

This is to certify that Mr. SUNEEL B SHADISHYALI of our Institute has completed

Dissertation work on “CAN INDIVIDUAL INVESTOR BEAT THE MARKET?” under

my guidance.

Prof. B V Krishnamurthy Prof. S.P.Srinivasan

Director and Executive Vice President Faculty
Alliance Business Academy Alliance Business Academy
Bangalore Bangalore

Date:
Place: Bangalore
 DECLARATION

I SUNEEL B SHADISHYALI studying in Alliance Business Academy, Bangalore do

hereby declare that this Dissertation Report on “CAN INDIVIDUAL INVESTOR BEAT
MARKET?” has been prepared by as part of the requirements of the MBA Program of
Bangalore University (Batch of 2003–2005). My guide for the training has been Prof.
S.P.Srinivasan

I further declare that this Dissertation report has not been submitted earlier to any other
University or Institute for the award of any Degree or Diploma.

SUNEEL B SHADISHYALI

Reg. No: 03VWCM6105

Date:
Place: Bangalore
 ACKNOWLEDGEMENT

I wish to express my deep sense of gratitude to Dr. Sudhir Angur, President,

Alliance Business Academy and Prof. B V Krishnamurthy, Director and Executive
Vice President for providing me the opportunity to carry out my dissertation work
successfully.

I also consider it as a great honour to express my heartful gratitude to my guide

Prof. S.P.Srinivasan for his kind support, advice and encouragement from the
beginning of the dissertation work till the completion of the dissertation report.

Last, but not least I would like to express my deep sense of gratitude and thanks to
my parents, who have taken pains in bringing me up to this stage of education.
 TABLE OF CONTENTS
Chapter No Topic Page No

Executive summary 01
1 Theoretical background of the Study 02
2 Design of the study 05
3 Profile 07
3.1 Investment 07
3.2 Investor and Types of Investors 07
3.3 Stock market strategy for the winners 10
3.4 Investment criteria 12

3.5 The Efficient Market Hypothesis & 13

the Random Walk Theory

3.6 Fundamental analysis 18
3.7 Fundamental Analysis Tools 19
3.8 How Many Stocks Should You Own? 25
3.9 Investing Philosophies 26
3.10 Value Investing Guidelines 28
3.11 Why the Market Rises and Falls 29
3.12 National Stock Exchange 31
3.13 Bombay Stock Exchange 33

4 Data analysis and Interpretation

4.1 Auto Correlation function and Run test 35
4.2 Fundamental Analysis 44
5 Summary of Findings & Conclusion
5.1 Findings 63
5.2 Recommendations 64
5.3 Conclusion 65
Bibliography 66
 EXECUTIVE SUMMARY

"You don't make money by investing in a good company. You make money by investing
in a company that is better than the market thinks,” Investments are done with an
objective of earning some return in future. If an individual is not earning return on his
investment then his investment decision is not justifiable. Taking investment decision is
very important for an individual. Some investors, who invest in a stock without proper
background study of that company, may earn a positive return. But all the time the
individual cannot depend on luck, he should take a proper investment decision. If a
correct investment decision is made the individual investor can not only earn return but
many a times he can beat the market also.

Under this background the study has been conducted to test whether it is possible for the
individual investor to beat the market. For this purpose it is essential to study the
efficiency of the stock market. The analysis was carried out in this study to test the
efficiency level of the Indian Stock market and also to test whether the prices of the
indices follow a random walk or not, by using the run test and the autocorrelation
function and fundamental analysis of stocks The study carried out in this research has
presented the evidence of the inefficient form of the Indian Stock Market. This means
that the individual investor can beat the stock market.

This also means that historical data can be used to predict future value of stock prices.
Using fundamental analysis the worth of companies can be found out and based on this
stock can be selected. Mid cap companies are providing more returns than sensex and
nifty companies so it is better to invest in mid cap companies. Some mid cap companies
are providing more than 100% returns for a year.

When you become an investor, you need to decide whether you will seek the advice of a
professional or not when making your investment decisions. Your advisor will give you
reasons for where to put your money, how much, and whether to buy, sell, or hold a
stock. . Deciphering the performance of a company and predicting its future prospects
requires 'analysis'. While a majority (54%) relied on fundamental analysis, 27% seemed
to be following technical charts while the remaining 19% based their decisions purely on
news and rumours.

1
 1. BACKGROUND OF THE STUDY

It's one of the great investment contradictions. Yes, stock investors do all kinds of goofy
things. No, beating the market isn't easy. On the face of it, this seems absurd. If some
folks behave irrationally, others should be able to make money at their expense. Yet, as is
patently clear from the long-run market-lagging performance of most stock, it is awfully
difficult to beat the market. This isn't just an issue of how to manage money. It is also a
raging debate among finance professors. For years, the prevailing academic wisdom was
that the stock market was highly efficient, with prices set by rational investors. But lately,
that notion has come under assault from behavioralists, who argue that market
movements aren't adequately explained by traditional economic models. No doubt about
it, irrationality is on display everywhere. Why do investors trade so much? All that
buying and selling can't be rationally justified. Why do companies bother splitting their
stocks, say, two for one? All it means is that shareholders now have twice as many
shares, each with a 50% smaller claim on the company's earnings. Why do companies
pay dividends? From the standpoint of taxes, it makes far more sense to buy back stock.
Yet shares often rise after a company announces a dividend increase. "It doesn't look to
me like markets behave as if investors are rational," says Richard Thaler, an economics
professor at the University of Chicago. "Everybody agrees that there are some irrational
investors out there," Mr. Thaler says. "The controversial question is whether they set
prices. The behavioralist line is that they do some of the time. The efficient-market line is
that prices are set by rational traders." Not all behavioral quirks hurt market efficiency.
Many investors, for instance, are excessively self-confident. This shows up in investors'
ill-advised tendency to trade too much and to bet heavily on a limited number of stocks.
But it also manifests itself in the huge effort made to find undervalued stocks. Mr.
Rubinstein says. "But what this means is that active manager spend too much on
research. It makes the markets too efficient. It's like a gold mine where most of the gold
has already been taken out. Occasionally, you'll find some, which will egg you on. But
it's just not cost-effective to keep mining." Mr. Thaler says the validity of behavioral
economics doesn't hinge on being able to beat the market. "It could be that stock prices
were wildly irrational, but unpredictable," he says. "If so, it wouldn't be possible to make

2
money." Indeed, even if you buy the behavioralist argument that the markets aren't
entirely efficient -- and the evidence is compelling -- that doesn't mean you should try to
beat the market. "Markets aggregate those mistakes. But in the aggregation, the errors
become smaller than those made by individuals.

The efficient market hypothesis (EMH) says that at any given time, asset prices fully
reflect all available information. The chief corollary of the idea that markets are efficient,
that prices fully reflect all information, is that price movements do not follow any
patterns or trends. This means that past price movements cannot be used to predict future
price movements. Rather, prices follow what is known as a 'random walk', an intrinsically
unpredictable pattern. The random walk is often compared to the path a sailor might
follow out of a bar after a long, hard night drinking.

In the world of the strong form EMH, trying to beat the market becomes a game of
chance not skill. There will be superior performers generating better investment returns
but only because statistically there are always some people above the average and others
below. Hence, debate about the EMH becomes a question of whether active portfolio
management works: is it possible to beat the market or are you better off avoiding the
transactions costs and simply buying an index fund?

The weak form of the EMH asserts that all past market prices and data are fully reflected
in asset prices. The implication of this is that technical analysis cannot be used to beat the
market.

The semi-strong form of the EMH asserts that all publicly available information is fully
reflected in asset prices. The implication of this is that neither technical nor fundamental
analysis can be used to beat the market.

The strong form of the EMH asserts that all information - public and private - is fully
reflected in asset prices. The implication of this is that not even insider information can
be used to beat the market.

The idea of informationally efficient markets; the greater the number of participants, the
better their training and knowledge and the faster the dissemination of information, the
more efficient a market should be; and the more efficient the market, the more random
the sequence of price changes it generates, until in the most efficient market, prices are
completely random and unpredictable. That is to say that the more lemmings there are,
the less likely they all are to fall over the cliff. Similarly, if everyone believes the market

3
is efficient, then it will no longer be efficient since no one will invest actively. In effect,
efficient markets depend on investors believing the market is inefficient and trying to
beat it.

In reality, markets are neither perfectly efficient nor completely inefficient. All are
efficient to a certain degree - and new technology probably serves to make them more
efficient. But some markets are more efficient than others. And in markets with
substantial pockets of predictability, active investors can strive for outperformance. Peter
Bernstein concludes that there is hope for active management: 'the efficient market is a
state of nature dreamed up by theoreticians. Neat, elegant, even majestic, it has nothing to
do with the real world of uncertainty in which you and I must make decisions every day
we are alive.'

4
 2. DESIGN OF THE STUDY

Problem of study:

To collect the data of selected scripts representing all industries and analyzing their
individual share prices compared with market indices. This study emphasizes more on
testing efficiency of stock markets in India.

Objective of the study:

• To test Market efficiency

• To study whether individual investor can beat the market or not?
• To know the influence of individual and institutional investors on the stock
market.

Scope of Study:

The study envisages mainly on investors influence on the performance and efficiency on
stock market.

RESEARCH METHODOLOGY
Type of Research : Analytical Research

Sources of Data : NSE, S & P CNX Nifty, BSE Sensex, Capitaline

Research Instruments : Auto Correlation, Run Test.

Methodology of Data
Collection : Secondary Data.

Plan of Analysis:

• Auto Correlation and Run Test are used to test whether

market is Efficient or inefficient.
• To measure individual stock performance we found out P/E
Ratio, EPS and Beta of individual stocks.

5
Limitations of Study:

• Unavailability of data regarding individual investors

influence on market.
• Unavailability of evidence of insider trading in the stock
market.
• Research is restricted to Equity stocks only.
• The historical data of the companies is taken for only 1
year.

Operational definitions of concepts:

Auto correlation test: A test of the efficient market hypothesis that compares the security
price changes over a time to check for predictable correlation pattern.

Run test: A test of the weak form efficient market hypothesis that checks for trends that
persist longer in terms of positive or negative price changes than one would expect for a
random series.

P/E Ratio: The number by which expected earning per share is multiplied to estimate a
stock value; also called the earnings multiplier.

Beta: A standardized measure of systematic risk based upon an assets co-variance with
the market portfolio.

EPS = Net Earnings / Outstanding Shares.

6
 3. PROFILE
3.1 Investment
Investment means

1. The act of investing; laying out money or capital in an enterprise with the
expectation of profit
2. Outer layer or covering of an organ or part or organism
3. Money that is invested with an expectation of profit

3.2 Investor

An individual means who makes an investment. An investor can act on behalf of others,
for example, stock brokers or mutual fund managers make investments for others. Or else
an investor can make investments for ones own personal account

Types of Investors

Just as there are different types of investments, there are also different types of investors.
Depending on your investment knowledge, income level and stage in life, you could find
yourself investing aggressively or conservatively, and as your investment knowledge
grows, and your goals and means change, you may move from one type of investing to
the other.
Below are the different investor descriptions and sample asset allocation charts which
show how investment portfolios could be structured among the three main asset
categories — cash, fixed income and growth — to best meet an investor’s needs. (these
examples are suggestions only and will not suit every investor. For help in structuring
your investment portfolio,

7
60%

90%

75%

85%
8
When you become an investor, you need to decide whether you will seek the advice of a
professional or not when making your investment decisions. Getting help from
professionals will cost you, but they will charge only a small fraction of your total
portfolio value. Also, a professional investment advisor is usually more familiar with the
market than an average investor and has more time to research different stocks.

A professional advisor will give you advice about making investment choices and can
make you more comfortable about handling the stock market. Your advisor will give you
reasons for where to put your money, how much, and whether to buy, sell, or hold a
stock. Your experiences with your advisor can be very educational, and you may feel
under less stress with someone helping you.

Many people benefit from getting help from experts. They receive advice and act
accordingly with the advisor’s recommendations. You should choose an advisor that has
the same philosophies and investing style as you. The bottom line is that you should feel
at ease because you have an advisor. Another important factor is to choose someone who
has more experience than a novice investor. Your money should be well spent, and most
of your decision about whether to get professional help or not will be psychological.
Will you feel better knowing someone is by your side?

On the other hand, many investors cannot put up with getting professional help. These
people usually have strong opinions and a strong sense of their investment goals. In this
case, an investment advisor won’t be helpful. An advisor is supposed to help you, and he
will be meaningless if you already have a strong sense of direction.

There are not set rules on how you should invest your money and which way is the best
for you. An advisor should make suggestions according to your investment style, not his.
Investors will have more than one way of making investing successful for them. The
most important issue is whether or not you feel comfortable with the method used for
your money. Whichever strategy you choose, you will have many choices for profitable
investing.

9
 1. The risk-taking investor who aims to achieve the highest possible profit: select
dynamic portfolio.

2. The investor who seeks a most balanced risk/return ratio: select balanced
portfolio.

3. The Investor who wants a high proportion of security: select conservative

portfolio

3.3 Stock market strategy for the winners

The recent fall of indices resulted in many speculators and day traders losing their shirts.
Crores of rupees worth of capitalisation was lost in a week. The momentum investors
who were jubilant at the rising charts during the last six months were suddenly cornered,
and many of them lost a substantial part of the gain that they had made. An investor who
plans his investment prudently, keeping a long-term horizon in mind, will succeed even if
the indices go down.

Invest for the long term: When Keynes said, in the long run we are all dead, he was
certainly not referring to the stock market. The success in stock market largely depends
upon your ability to stay invested for a long period. It is strange few people heed this
advice! Most investors in Indian markets continue to be short-term investors, and
speculators. Day trading is an important characteristic of Indian stock markets. Short-
term investment is nothing more than a speculation, and you can rather try your luck at
horse races, or at casinos where the probability of success is higher!

Do not time the market: A long-term investor does not try to predict the direction the
market is going to take. You should not wait for the market to rise or fall before you
decide to invest. Since as a long-term investor you will be focusing on the value of
individual share, rather than the frenzy of the market, market direction should not be a

10
cause of concern, as long as you are sure that the investment you are making is attractive,
and has a sufficient margin of safety built into it. As a long-term investor, you should not
hold your cash, waiting for the market to fall, so that you can invest when the prices are
low. You should know the time value of money, which means that the early you invest
the higher will be your return. Moreover, if you invest regularly, you are able to take
advantage of 'rupee averaging', which takes care of market fluctuations.

Do your homework: As a long-term investor you should know the fundamental value of
the share you are buying. Remember that PE ratio is not the acid test of investment. Low
PE ratio does not on its own make a particular company worthy of investment, and high
PE, per se, does not make a share less attractive. Other factors like the quality of
management, break-up value of the share, debt-equity ratio, interest coverage ratios are
equally important.

Do not invest in penny stocks: Penny stocks and junk scripts look attractive to the
investor when the indices are rising, since the price of these shares usually rise faster than
the rise in prices of other shares. However, when the market falls, the investor is left with
junk, which has no value. As a matter of principle, you should invest in stock of the only
such companies whose fundamentals are known to you. Do not depend on tips, however
reliable the source of tip may be. Most of the tips are generated by people with vested
interest. Even when the source of the tip is genuine, the time frame the issuer has in mind
may be different. If you are tempted to act on a tip, study facts before you decide to go
ahead.

Do not panic: This is very important. More money is made in stock market by remaining
inactive. It is foolish for a long-term investor to be excited or subdued by the market
ticker. CNBC channel is for the short-term traders and day-traders, do not let the opinions
expressed there affect your investment decision. If you are confident your investment is
fundamentally strong, every fall should give you an opportunity to buy rather than sell.
Of course, while you do that keep in mind the principle.

Don't pull your flowers and water your weeds: This strong advice comes from Warren
Buffet, the most successful disciple of Ben Graham. The greatest mistake most investors
make is to sell the shares that have appreciated, and hold the ones, which are giving a
negative return. The investment strategy should be the other way round; you should sell
the losers and let the winners ride. Do not mean that you should sell every share that has

11
depreciated. The right course is to keep pruning your field regularly to identify the weed
so that they could be removed, and to identify the flowers that should be watered as long
as their fundamental value is below the prevailing market price.

Do not invest in the company and sector whose business you do not understand: If
you can understand a business and you find value there, invest. Do not be tempted to
invest in industry about which you do not have much idea. While there is so much money
to be made in technology shares, yet if you do not understand the business, it is better you
do not go into it. Investment philosophy is to invest in the business,

Do your own research: Security analysis is not as difficult as it may seem. You do not
have to be a qualified analyst to do the analysis. A basic book on reading the financial
statements of a company will be a great investment. Few investor say that more money is
made by being inactive in the market, it certainly do not mean that you should invest and
forget. On the other hand, you should keep reviewing the performance of the company
you have invested in. If there is a fundamental change in the situation of your company,
which has altered the premise based on which you had bought the shares, decide if the
change warrants a change in your portfolio.

These principles have been perfected by masters and are time-tested technique for long-
term investment in the market. While this is not the only way one can invest, this method
is more scientific and if applied consistently, it would make the process of investment a
less risky proposition with higher margin of safety.

3.4 What is your investment criterion?

"You don't make money by investing in a

good company. You make money by
investing in a company that is better than the
market thinks," wrote Warren Buffet in one
of his letters to the shareholders of Berkshire
Hathaway. Deciphering the performance of
a company and predicting its future

12
prospects requires 'analysis'. While a majority (54%) relied on fundamental analysis, 27%
seemed to be following technical charts while the remaining 19% based their decisions
purely on news and rumours.

3.5 The Efficient Market Hypothesis& The Random Walk Theory

An issue that is the subject of intense debate among academics and financial
professionals is the Efficient Market Hypothesis (EMH). The Efficient Market
Hypothesis states that at any given time, security prices fully reflect all available
information. The implications of the efficient market hypothesis are truly profound. Most
individuals that buy and sell securities (stocks in particular), do so under the assumption
that the securities they are buying are worth more than the price that they are paying,
while securities that they are selling are worth less than the selling price. But if markets
are efficient and current prices fully reflect all information, then buying and selling
securities in an attempt to outperform the market will effectively be a game of chance
rather than skill.

The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of
Eugene Fama. Fama persuasively made the argument that in an active market that
includes many well-informed and intelligent investors, securities will be appropriately
priced and reflect all available information. If a market is efficient, no information or
analysis can be expected to result in outperformance of an appropriate benchmark.

"An 'efficient' market is defined as a market where there are large numbers of rational,
profit-maximizers actively competing, with each trying to predict future market values of
individual securities, and where important current information is almost freely available
to all participants. In an efficient market, competition among the many intelligent
participants leads to a situation where, at any point in time, actual prices of individual
securities already reflect the effects of information based both on events that have already
occurred and on events which, as of now, the market expects to take place in the future.
In other words, in an efficient market at any point in time the actual price of a security
will be a good estimate of its intrinsic value."

13
The random walk theory asserts that price movements will not follow any patterns or
trends and that past price movements cannot be used to predict future price movements.
Much of the theory on these subjects can be traced to French mathematician Louis
Bachelier whose Ph.D. dissertation titled "The Theory of Speculation" (1900) included
some remarkably insights and commentary. Bachelier came to the conclusion that "The
mathematical expectation of the speculator is zero" and he described this condition as a
"fair game." Unfortunately, his insights were so far ahead of the times that they went
largely unnoticed for over 50 years until his paper was rediscovered and eventually
translated into English and published in 1964.

There are three forms of the efficient market hypothesis

1. The "Weak" form asserts that all past market prices and data are fully reflected
in securities prices. In other words, technical analysis is of no use.
2. The "Semistrong" form asserts that all publicly available information is fully
reflected in securities prices. In other words, fundamental analysis is of no use.
3. The "Strong" form asserts that all information is fully reflected in securities
prices. In other words, even insider information is of no use.

Securities markets are flooded with thousands of intelligent, well-paid, and well-educated
investors seeking under and over-valued securities to buy and sell. The more participants
and the faster the dissemination of information, the more efficient a market should be.

The debate about efficient markets has resulted in hundreds and thousands of empirical
studies attempting to determine whether specific markets are in fact "efficient" and if so
to what degree. Many novice investors are surprised to learn that a tremendous amount of
evidence supports the efficient market hypothesis. Early tests of the EMH focused on
technical analysis and it is chartists whose very existence seems most challenged by the
EMH. And in fact, the vast majority of studies of technical theories have found the
strategies to be completely useless in predicting securities prices. However, researchers
have documented some technical anomalies that may offer some hope for technicians,
although transactions costs may reduce or eliminate any advantage.

Researchers have also uncovered numerous other stock market anomalies that seem to
contradict the efficient market hypothesis. The search for anomalies is effectively the

14
search for systems or patterns that can be used to outperform passive and/or buy-and-hold
strategies. Theoretically though, once an anomaly is discovered, investors attempting to
profit by exploiting the inefficiency should result its disappearance. In fact, numerous
anomalies that have been documented via back-testing have subsequently disappeared or
proven to be impossible to exploit because of transactions costs.

The paradox of efficient markets is that if every investor believed a market was efficient,
then the market would not be efficient because no one would analyze securities. In effect,
efficient markets depend on market participants who believe the market is inefficient and
trade securities in an attempt to outperform the market.

In reality, markets are neither perfectly efficient nor completely inefficient. All markets
are efficient to a certain extent, some more so than others. Rather than being an issue of
black or white, market efficiency is more a matter of shades of gray. In markets with
substantial impairments of efficiency, more knowledgeable investors can strive to
outperform less knowledgeable ones. Government bond markets for instance, are
considered to be extremely efficient. Most researchers consider large capitalization stocks
to also be very efficient, while small capitalization stocks and international stocks are
considered by some to be less efficient. Real estate and venture capital, which don't have
fluid and continuous markets, are considered to be less efficient because different
participants may have varying amounts and quality of information.

The efficient market debate plays an important role in the decision between active and
passive investing. Active managers argue that less efficient markets provide the
opportunity for outperformance by skillful managers. However, its important to realize
that a majority of active managers in a given market will underperform the appropriate
benchmark in the long run whether markets are or are not efficient. This is because active
management is a zero-sum game in which the only way a participant can profit is for
another less fortunate active participant to lose. However, when costs are added, even
marginally successful active managers may underperform. "I believe a third view of
market efficiency, which holds that the securities market will not always be either quick
or accurate in processing new information. On the other hand, it is not easy to transform
the resulting opportunities to trade profitably against the market consensus into superior
portfolio performance. Unless the active investor understands what really goes on in the

15
trading game, he can easily convert even superior research information into the kind of
performance that will drive his clients to the poorhouse . why aren't more active investors
consistently successful? The answer lies in the cost of trading."

Jack Treynor If markets are efficient, the serious question for investment professionals is
what role can they play Those that accept the EMH generally reason that the primary role
of a portfolio manager consists of analyzing and investing appropriately based on an
investor's tax considerations and risk profile. Optimal portfolios will vary according to
factors such as age, tax bracket, risk aversion, and employment. The role of the portfolio
manager in an efficient market is to tailor a portfolio to those needs, rather than to beat
the market.

While proponents of the EMH don't believe its possible to beat the market, some believe
that stocks can be divided into categories based on risk factors (and corresponding higher
or lower expected returns). For instance, some believe that small stocks are riskier and
therefore are expected to have higher returns. Similarly some believe "value" stocks are
riskier than "growth" stocks and therefore have higher expected returns. Faced with the
inference that they cannot add value, many active managers argue that the markets are
not efficient (otherwise their jobs can be viewed as nothing more than speculation).
Similarly, the investment media is generally considered to be ambivalent toward the
efficient market hypothesis because they make money supplying information to investors
who believe that the information has value (beyond the time when it initially becomes
public). If the information is rapidly reflected in prices, there is no reason for investors to
seek (or purchase) information about securities and markets.

While many argue that outperformance by one or more participants in a market signifies
an inefficient market, it's important to recognize that successful active managers should
be evaluated in the context of all participants. Its difficult in many cases to determine
whether outperformance can be attributed to skill as opposed to luck. For instance, with
hundreds or even thousands of active managers, its common and in fact expected (based
on probability) that one or more will experience sustained and significant

16
outperformance. However, the challenge is to identify an outperformer before the fact,
rather than in hindsight.

Additionally, in many cases, strong performers in one period frequently turn around and
underperform in subsequent periods. A substantial number of studies have found little or
no correlation between strong performers from one period to the next. The lack of
consistent performance persistence among active managers is further evidence in support
of the EMH

"Market efficiency is a description of how prices in competitive markets respond to new

information. The arrival of new information to a competitive market can be likened to the
arrival of a lamb chop to a school of flesh-eating piranha, where investors are - plausibly
enough - the piranha. The instant the lamb chop hits the water, there is turmoil as the fish
devour the meat. Very soon the meat is gone, leaving only the worthless bone behind,
and the water returns to normal. Similarly, when new information reaches a competitive
market there is much turmoil as investors buy and sell securities in response to the news,
causing prices to change. Once prices adjust, all that is left of the information is the
worthless bone. No amount of gnawing on the bone will yield any more meat, and no
further study of old information will yield any more valuable intelligence."

Realize that a majority of active managers in a given market will underperform the
appropriate benchmark in the long run whether markets are or are not efficient. This is
because active management is a zero-sum game in which the only way a participant can
profit is for another less fortunate active participant to lose. However, when costs are
added, even marginally successful active managers may underperform.

"All believe a third view of market efficiency, which holds that the securities market will
not always be either quick or accurate in processing new information. On the other hand,
it is not easy to transform the resulting opportunities to trade profitably against the
market consensus into superior portfolio performance. Unless the active investor
understands what really goes on in the trading game, he can easily convert even superior
research information into the kind of performance that will drive his clients to the
poorhouse . why aren't more active investors consistently successful? The answer lies in
the cost of trading."

17
 3.6 Fundamental analysis

Fundamental analysis is the process of looking at a business at the basic or fundamental

financial level. This type of analysis examines key ratios of a business to determine its
financial health and gives you an idea of the value its stock. Many investors use
fundamental analysis alone or in combination with other tools to evaluate stocks for
investment purposes. The goal is to determine the current worth and, more importantly,
how the market values the stock. This focuses on the key tools of fundamental analysis
and what they tell you. Even if you don’t plan to do in-depth fundamental analysis
yourself, it will help you follow stocks more closely if you understand the key ratios and
terms.

Earnings

It’s all about earnings. When you come to the bottom line, that’s what investors want to
know. How much money is the company making and how much is it going to make in
the future. Earnings are profits. It may be complicated to calculate, but that’s what buying
a company is about. Increasing earnings generally leads to a higher stock price and, in
some cases, a regular dividend. When earnings fall short, the market may hammer the
stock. Every quarter, companies report earnings. Analysts follow major companies
closely and if they fall short of projected earnings, sound the alarm.

While earnings are important, by themselves they don’t tell you anything about how the
market values the stock. To begin building a picture of how the stock is valued you need
to use some fundamental analysis tools. These ratios are easy to calculate.

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 3.7 Fundamental Analysis Tools

These are the most popular tools of fundamental analysis. They focus on earnings,
growth, and value in the market. For convenience, It has broken them into separate parts.
Each part discusses related ratios.

Earnings Per Share

One of the challenges of evaluating stocks is establishing an “apples to apples”

comparison. It mean by this is setting up a comparison that is meaningful so that the
results help you make an investment decision.

Comparing the price of two stocks is meaningless Similarly, comparing the earnings of
one company to another really doesn’t make any sense, if you think about it. Using the
raw numbers ignores the fact that the two companies undoubtedly have a different
number of outstanding shares.

For example, companies A and B both earn Rs100, but company A has 10 shares
outstanding, while company B has 50 shares outstanding. Which company’s stock do you
want to own? It makes more sense to look at earnings per share (EPS) for use as a
comparison tool.

You calculate earnings per share by taking the net earnings and divide by the outstanding
shares.

EPS = Net Earnings / Outstanding Shares

Using our example above, Company A had earnings of Rs100 and 10 shares outstanding,
which equal an EPS of 10 (Rs100 / 10 = 10). Company B had earnings of Rs100 and 50
shares outstanding, which equal an EPS of 2 (Rs100 / 50 = 2).

So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the
basis of its EPS. The EPS is helpful in comparing one company to another, assuming they
are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what
the market thinks of it.

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There are three types of EPS numbers:

• Trailing EPS – last year’s numbers and the only actual EPS
• Current EPS – this year’s numbers, which are still projections
• Forward EPS – future numbers, which are obviously projections

Price to Earnings Ratio

If there is one number that people look at than more any other it is the Price to Earning
Ratio (P/E). The P/E is one of those numbers that investors throw around with great
authority as if it told the whole story. Of course, it doesn’t tell the whole story

The P/E looks at the relationship between the stock price and the company’s earnings.
The P/E is the most popular metric of stock analysis, although it is far from the only one
you should consider.

You calculate the P/E by taking the share price and dividing it by the company’s EPS

P/E = Stock Price / EPS

For example, a company with a share price of Rs40 and an EPS of 8 would have a P/E of
5 (Rs40 / 8 = 5).

What does P/E tell you? The P/E gives you an idea of what the market is willing to pay
for the company’s earnings. The higher the P/E the more the market is willing to pay for
the company’s earnings. Some investors read a high P/E as an overpriced stock and that
may be the case, however it can also indicate the market has high hopes for this stock’s
future and has bid up the price. Conversely, a low P/E may indicate a “vote of no
confidence” by the market or it could mean this is a sleeper that the market has
overlooked. Known as value stocks, many investors made their fortunes spotting these
“diamonds in the rough” before the rest of the market discovered their true worth.

What is the “right” P/E? There is no correct answer to this question, because part of the
answer depends on your willingness to pay for earnings. The more you are willing to pay,
which means you believe the company has good long term prospects over and above its
current position, the higher the “right” P/E is for that particular stock in your decision-
making process. Another investor may not see the same value and think your “right” P/E
is all wrong.

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Projected growth in earnings

The P/E is the most popular way to compare the relative value of stocks based on
earnings because you calculate it by taking the current price of the stock and divide it by
the Earnings Per Share (EPS). This tells you whether a stock’s price is high or low
relative to its earnings. Some investors may consider a company with a high P/E
overpriced and they may be correct. A high P/E may be a signal that traders have pushed
a stock’s price beyond the point where any reasonable near term growth is probable.

However, a high P/E may also be a strong vote of confidence that the company still has
strong growth prospects in the future, which should mean an even higher stock price.
Because the market is usually more concerned about the future than the present, it is
always looking for some way to project out. Another ratio you can use will help you look
at future earnings growth is called the PEG ratio. The PEG factors in projected earnings
growth rates to the P/E for another number to remember. You calculate the PEG by
taking the P/E and dividing it by the projected growth in earnings.

PEG = P/E / (projected growth in earnings)

Price to Sales Ratio

You have a number of tools available to you when it comes to evaluating companies with
earnings. You can add the two others on dividends and the one on return on equity to the
list as specific to companies that are or have made money in the past. Does that mean
companies that don’t have any earnings are bad investments? Not necessarily, but you
should approach companies with no history of actually making money with caution. The
Internet boom of the late 1990s was a classic example of hundreds of companies coming
to the market with no history of earning – some of them didn’t even have products yet.
Fortunately, that’s behind us. However, we still have the problem of needing some
measure of young companies with no earnings, yet worthy of consideration. One ratio
you can use is Price to Sales or P/S ratio. This metric looks at the current stock price
relative to the total sales per share. You calculate the P/S by dividing the market cap of
the stock by the total revenues of the company. You can also calculate the P/S by
dividing the current stock price by the sales per share.

P/S = Market Cap / Revenues or P/S = Stock Price / Sales Price Per Share

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Much like P/E, the P/S number reflects the value placed on sales by the market. The
lower the P/S, the better the value, at least that’s the conventional wisdom. However, this
is definitely not a number you want to use in isolation. When dealing with a young
company, there are many questions to answer and the P/S supplies just one answer

Price to Book Ratio

Investors looking for hot stocks aren’t the only ones trolling the markets. A quiet group
of folks called value investors go about their business looking for companies that the
market has passed by. Some of these investors become quite wealthy finding sleepers,
holding on to them for the long term as the companies go about their business without
much attention from the market, until one day they pop up on the screen, and some
analyst “discovers” them and bids up the stock. Meanwhile, the value investor pockets a
hefty profit.

Value investors look for some other indicators besides earnings growth and so on. One of
the metrics they look for is the Price to Book ratio or P/B. This measurement looks at the
value the market places on the book value of the company. You calculate the P/B by
taking the current price per share and dividing by the book value per share.

P/B = Share Price / Book Value Per Share

Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B
is stock screens, for instance, to identify potential candidates.

Dividend Payout Ratio

There are some metrics used in fundamental analysis that fall into what I call the “ho-
hum” category. The Dividend Payout Ratio (DPR) is one of those numbers. It almost
seems like a measurement invented because it looked like it was important, but nobody
can really agree on why. The DPR (it usually doesn’t even warrant a capitalized
abbreviation) measures what a company’s pays out to investors in the form of dividends.
You calculate the DPR by dividing the annual dividends per share by the Earnings Per
Share.

DPR = Dividends Per Share / EPS

For example, if a company paid out Rs10 per share in annual dividends and had Rs30 in
EPS, the DPR would be 33%. (Rs10 / Rs30 = 33%) The real question is whether 33% is

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good or bad and that is subject to interpretation. Growing companies will typically retain
more profits to fund growth and pay lower or no dividends. Companies that pay higher
dividends may be in mature industries where there is little room for growth and paying
higher dividends is the best use of profits (utilities used to fall into this group, although in
recent years many of them have been diversifying). Either way, you must view the whole
DPR issue in the context of the company and its industry. By itself, it tells you very little.

Dividend Yield
Not all of the tools of fundamental analysis work for every investor on every stock. If you
are looking for high growth technology stocks, they are unlikely to turn up in any stock
screens you run looking for dividend paying characteristics. However, if you are a value
investor or looking for dividend income then there is a couple of measurements that are
specific to you. For dividend investors, one of the telling metrics is Dividend Yield.

This measurement tells you what percentage return a company pays out to shareholders
in the form of dividends. Older, well-established companies tend to payout a higher
percentage then do younger companies and their dividend history can be more consistent.
You calculate the Dividend Yield by taking the annual dividend per share and divide by
the stock’s price.

Dividend Yield = annual dividend per share / stock's price per share

For example, if a company’s annual dividend is Rs1.50 and the stock trades at Rs25, the
Dividend Yield is 6%. (Rs1.50 / Rs25 = 0.06)

Book Value
How much is a company worth and is that value reflected in the stock price? There are
several ways to define a company’s worth or value. One of the ways you define value is
market cap or how much money would you need to buy every single share of stock at the
current price. Another way to determine a company’s value is to go to the balance
statement and look at the Book Value. The Book Value is simply the company’s assets
minus its liabilities.

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Book Value = Assets - Liabilities

In other words, if you wanted to close the doors, how much would be left after you
settled all the outstanding obligations and sold off all the assets. A company that is a
viable growing business will always be worth more than its book value for its ability to
generate earnings and growth. Book value appeals more to value investors who look at
the relationship to the stock's price by using the Price to Book ratio.

To compare companies, you should convert to book value per share, which is simply the
book value divided by outstanding shares

Return on Equity
If you give some management teams a couple of boards, some glue, and a ball of string,
they can build a profitable growing business, while other teams can’t make a profit with
several billion dollars worth of assets. Return on Equity (ROE) is one measure of how
efficiently a company uses its assets to produce earnings. You calculate ROE by dividing
Net Income by Book Value. A healthy company may produce an ROE in the 13% to 15%
range. Like all metrics, compare companies in the same industry to get a better picture.
While ROE is a useful measure, it does have some flaws that can give you a false picture,
so never rely on it alone.

There are other situations such as taking write-downs, stock buy backs, or any other
accounting slight of hand that reduces book value, which will produce a higher ROE
without improving profits. It may also be more meaningful to look at the ROE over a
period of the past five years, rather than one year to average out any abnormal numbers.
Given that you must look at the total picture, ROE is a useful tool in identifying
companies with a competitive advantage. All other things roughly equal, the company
that can consistently squeeze out more profits with their assets, will be a better
investment in the long run.

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 3.8 How Many Stocks Should You Own?
How many different stocks should you own? There is no absolute answer to that question
– every investor will come up with an answer that suits his or her particular situation.
However, many investors find holding around 15 - 20 individual stocks spread over five
to seven different industries gives them a well-diversified portfolio. If you are just
starting out, don’t panic and think you have to get to this level all at once. This is a goal,
not a starting point. Even then, the most successful individual investor of all times,
Warren Buffett is not sold on the value of spreading your money over a large number of
stocks. However, since we’re not Warren Buffett, the prudent thing to do is protect
yourself with a diversified portfolio.

What your stock portfolio looks like depends on several things:

• Your financial goals
• Your risk tolerance
• Your time horizon

These factors will drive how conservative or aggressive your mix of stocks is. If your
strategy is conservative, your portfolio will favor stocks from industries that tend toward
slow, but steady growth in all types of business cycles, such as:
• Consumer staples stocks
• Utility stocks

A more aggressive approach might target these investments:

• Foreign stocks
• High growth stocks
• Technology stocks

The conservative investor will want to focus more on larger, well-established companies,
while a more aggressive investor might look for some percentage of investment to go
toward smaller, emerging companies with larger potential for growth, but at a higher risk.

Other Parts of Portfolio

Of course, stocks are just one part of a diversified portfolio. Spreading your money over
different asset classes to include bonds and cash as well as stocks gives you a better risk

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profile. The more conservative investor will place more assets in bonds and cash, while
the aggressive investor will do the opposite and fund stocks over bonds and cash.

3.9 Investing Philosophies -

A Look at Growth, Income, and Value Investing
Developing an investing philosophy may seem like an academic exercise, however over
time, it will help shape your thinking about the types of stocks that work for your
portfolio. This first of a two-part series looks at the three main investing philosophies:
• Growth
• Value
• Income
Most investors fall into one or a combination of these investing philosophies.

Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in
companies that have high potential for earning growth. High earning growth invariable
leads to high stock prices – at least in theory. Growth investors are willing to bet on
young companies that show promise of becoming leaders in their industry.

The technology stocks, especially during the late 1990s, were the perfect example of
growth stocks. Many of these young companies started with an idea and nothing more
and now are large successful companies. Of course, a great many more of those same
technology companies started out with an idea and nothing more and ended up where
they started. Which is to say that growth investing carries the risk that some of your
investments are going to fail. As much as Americans like success stories, there are more
failures than successes when it comes to market leadership.

Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean
cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or
more glamorous investments. The value investor looks for stocks with a low
price/earnings ratio meaning the market is not willing to pay much in the way of a
premium for the stock. Of course, the value investor needs to make sure there in nothing
wrong with the company that would warrant a low stock price other than neglect or
market inattention. Assuming the company is solid, the value investor’s strategy is to buy

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and hold the stock, anticipating the future time when the market will recognize the
company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straightforward of all philosophies and the most
conservative. Income is the motivation and investors target companies paying high and
consistent dividends. People near or in retirement are fond of this strategy for obvious
reasons. The companies that qualify for the income investor tend to be large and well
established. There is always some risk involved in investing in stocks, however this
remains the most conservative of the investing philosophies. If the stock price increases,
that’s icing on the cake for the income investor who would probably trade some capital
appreciation for a higher dividend.

Understanding Value Investing

Shouldn’t we all be value investors? After all, who wants to buy crummy stocks?
However, in this case, value investing refers to a particular philosophy that drives the
way an investor approaches selecting stocks. We should say up front that value investing
is not junk investing. Value investing is not shopping the bargain bin for seconds and
discontinued models.

Value investing is about finding stocks that the market has not correctly priced. In other
words, a stock that is worth more than is reflected in the current price.

Value Investor
The value investor, perhaps more than any other type of investor, is more concerned with
the business and its fundamentals than other influences on the stock’s price.
Fundamentals, such as earnings growth, dividends, cash flow, and book value are more
important than market factors on the stock’s price. Value investors are also buy and hold
investors who are with a company for the long term. If the fundamentals are sound, but
the stock’s price is below its obvious value, the value investor knows this is a likely
investment candidate. The market has incorrectly valued the stock. When the market
corrects that mistake, the stock’s price should experience a nice rise. Stock XYZ is down
25% from its high of six months ago. Is it a candidate for a value investor? Maybe, but
probably not. Value investors aren’t usually interested in beaten up stocks unless there is
no fundamental reason for the drop in price.

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The Market’s Right
This happens; however most of the time the market is right and a stock gets hammered
because of any number of sound fundamental reasons (declining earnings, declining
revenues, are good examples) or something fundamental changes in their market or
product line. A pharmaceutical company has a top seller yanked off the market by the
government - that fundamentally changes the company. On the other hand, other
pharmaceutical companies may see their stock clipped also even though they are not part
of the recall. That may make them worth a look by a value investor.

3.10 Value Investing Guidelines

What do value investors look for in a potential investment? Here are some guidelines
gathered from a variety of value investors. Investors should settle on a formula that works
for them, but it will probably include as a minimum these elements:

• A RE ratio in the bottom 10 percent of its sector.

• A PEG of less than one. A PEG of less than one may indicate the stock is
undervalued.
• A Debt to Equity Ratio of less than one.
• Strong earnings growth over an extended period. A realistic number might be in
the 6% - 8% range over 7 to 10 years.
• A Price to book ratio of one or less.
• Don’t pay more that 60% to 70% of the stock’s intrinsic per share price
A big challenge for the value investor, and all investors for that matter, is reconciling
market value and book value.

Intrinsic Value
Current accounting standards are adequate for measuring buildings and equipment (book
value), but as our economy has moved to a more technology/knowledge-base, many of
these intellectual assets never show up on financial statements.

Value investors acknowledge that their target investment company is much more
valuable as an ongoing business (expected cash flows, etc.) than its assets (market value).
In many cases, it is the intangibles – patents, trademarks, research and development,
brand, and so on – that drives the expectations of future growth, not hard assets. .

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Coming up with the intrinsic value of a stock is a complicated process and there are a
number of ways to get to the number.
Finding Intrinsic Value
Fortunately, there are several places you can go on the Web to find the number.
Indiainfoline.com calculates the number, which it calls “fair value,” on its site; however
you need to be a member. Take the two-week free trial to see if you like their service.
Another good source is Reuters which also requires a registration, but it is free. However
you arrive at the intrinsic or fair value, give yourself a margin of error with the thought
that if the calculation is wrong you might over pay. If you use one of the services
mentioned above or another source to find the intrinsic value, determine if they have
already factored in a margin of error. For example, if you believe the intrinsic value is
Rs40 per share, give yourself a margin of safety and lower the target to Rs36 per share.

3.11 Why the Market Rises and Falls

What moves the stock market?

That complex question has many answers. Some market movers are obvious, while
others creep up on us unseen. In this and subsequent articles, Investors ’ll look at some of
the economic, political, and societal issues that may cause the market to change direction
or speed up or slow down its momentum.

A quick list of the obvious includes:

• Inflation
• Interest rates
• Earnings
• Oil/Energy Prices
• War/terrorism
• Crime/fraud
• Serious domestic political unrest

As you can see, many of these have serious long-term implications, while others may
only cause temporary disruptions.

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However, the one factor not listed above that drives the market absolutely crazy is
uncertainty. The market cannot stand surprises and when there is the chance that
something may change, it rattles the market.
There is a theory that our stock markets are “efficient,” meaning that everyone has access
to the same information at the same time. Of course, this is not true, but in a broad sense,
the market taken as a whole expects to know about events and news in time to absorb
them.

For example, if the Federal Reserve Board’s Open Market Committee (the Fed) expects
to raise interest rates by one-quarter percent at its next meeting, the market will absorb
and factor that rate increase into prices before the committee meets. If the committee
follows through as expected, there is usually little or no market response. However, if the
Fed raises interest rates by one-half percentage point instead, the market will probably
react abruptly.

Surprising economic news, war or terrorism, and other unexpected events disturb the
markets sense of control and often send it in a tailspin. Of course, really good news can
cause a big bump in prices, but it seems like these days its bad news that captures most of
the headlines.

What Does this Mean to You?

For most investors, these market bumps are just those – temporary bumps that soon
smooth out. However, you need to be aware of the factors that move the market, since
they can create opportunities as well as problems.

If you have had you eye on a stock, but felt it was a little over-priced, one of these market
events might just take enough wind out of its price to put it in your buy range.

On the other hand, if you need to sell, watch for earnings reports, Fed meetings, and other
predictable events that might shave some points off your stock.

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 3.12 The National Stock Exchange

The National Stock Exchange (NSE) is India's leading stock exchange covering various
cities and towns across the country. NSE was set up by leading institutions to provide a
modern, fully automated screen-based trading system with national reach. The Exchange
has brought about unparalleled transparency, speed & efficiency, safety and market
integrity. It has set up facilities that serve as a model for the securities industry in terms
of systems, practices and procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and
settlement mechanism, and has witnessed several innovations in products & services viz.
demutualisation of stock exchange governance, screen based trading, compression of
settlement cycles, dematerialisation and electronic transfer of securities, securities
lending and borrowing, professionalisation of trading members, fine-tuned risk
management systems, emergence of clearing corporations to assume counterparty risks,
market of debt and derivative instruments and intensive use of information technology.

Our Technology
Across the globe, developments in information, communication and network
technologies have created paradigm shifts in the securities market operations.
Technology has enabled organisations to build new sources of competitive advantage,
bring about innovations in products and services, and to provide for new business
opportunities. Stock exchanges all over the world have realised the potential of IT and
have moved over to electronic trading systems, which are cheaper, have wider reach and
provide a better mechanism for trade and post trade execution.

NSE believes that technology will continue to provide the necessary impetus for the
organisation to retain its competitive edge and ensure timeliness and satisfaction in
customer service. In recognition of the fact that technology will continue to redefine the
shape of the securities industry, NSE stresses on innovation and sustained investment in
technology to remain ahead of competition. NSE's IT set-up is the largest by any
company in India. It uses satellite communication technology to energise participation
from around 400 cities spread all over the country. In the recent past, capacity

31
enhancement measures were taken up in regard to the trading systems so as to effectively
meet the requirements of increased users and associated trading loads. With upgradation
of trading hardware, NSE can handle up to 1 million trades per day. NSE has also put in
place NIBIS (NSE's Internet Based Information System) for on-line real-time
dissemination of trading information over the internet. In order to capitalise on in-house
expertise in technology, NSE set up a separate company, NSE.IT, in October 1999. This
is expected to provide a platform for taking up new IT assignments both within and
outside India and attaining global exposure.

NEAT is a state-of-the-art client server based application. At the server end, all trading
information is stored in an in-memory database to achieve minimum response time and
maximum system availability for users. The trading server software runs on a fault
tolerant STRATUS main frame computer while the client software runs under Windows
on PCs.

The telecommunications network uses X.25 protocol and is the backbone of the
automated trading system. Each trading member trades on the NSE with other members
through a PC located in the trading member's office, anywhere in India. The trading
members on the Wholesale Debt Market segment are linked to the central computer at the
NSE through dedicated 64Kbps leased lines and VSAT terminals. These leased lines are
multiplexed using dedicated 2 Mbps, optical-fibre links. The WDM participants connect
to the trading system through dial-up links.

The Exchange uses powerful RISC -based UNIX servers, procured from Digital and HP
for the back office processing. The latest software platforms like ORACLE 7 RDBMS,
GUPTA - SQL/ORACLE FORMS 4.5 Front - Ends, etc. have been used for the
Exchange applications. The Exchange currently manages its data centre operations,
system and database administration, design and development of in-house systems and
design and implementation of telecommunication solutions.

NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it
supports more than 3000 VSATs and is expected to grow to more than 4000 VSATs in
the next year. The NSE- network is the largest private wide area network in the country
and the first extended C- Band VSAT network in the world. Currently more than 9000
users are trading on the real time-online NSE application. There are over 15 large

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computer systems which include non-stop fault-tolerant computers and high end UNIX
servers, operational under one roof to support the NSE applications. This coupled with
the nation wide VSAT network makes NSE the country's largest Information Technology
user.

In an ongoing effort to improve NSE's infrastructure, a corporate network has been

implemented, connecting all the offices at Mumbai, Delhi, Calcutta and Chennai. This
corporate network enables speedy inter-office communications and data and voice
connectivity between offices. In keeping with the current trend, NSE has gone online on
the Internet. Apart from having a 2mbps link to VSNL and our own domain for internal
browsing and e-mail purposes, we have also set up our own Web site. Currently, NSE is
displaying its live stock quotes on the web site (www.nseindia.com) which are updated
online

3.13 BOMBAY STOCK EXCHANGE

The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as
"The Native Share and Stock Brokers Association". It is the oldest one in Asia, even
older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary
non-profit making Association of Persons (AOP) and is currently engaged in the process
of converting itself into demutualised and corporate entity. It has evolved over the years
into its present status as the premier Stock Exchange in the country. It is the first Stock
Exchange in the Country to have obtained permanent recognition in 1956 from the Govt.
of India under the Securities Contracts (Regulation) Act, 1956.

The Exchange, while providing an efficient and transparent market for trading in
securities, debt and derivatives upholds the interests of the investors and ensures redressal
of their grievances whether against the companies or its own member-brokers. It also
strives to educate and enlighten the investors by conducting investor education
programmes and making available to them necessary informative inputs.A Governing
Board having 20 directors is the apex body, which decides the policies and regulates the
affairs of the Exchange. The Governing Board consists of 9 elected directors, who are
from the broking community (one third of them retire ever year by rotation), three SEBI
nominees, six public representatives and an Executive Director & Chief Executive
Officer and a Chief Operating Officer.

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The Executive Director as the Chief Executive Officer is responsible for the day-to-day
administration of the Exchange and he is assisted by the Chief Operating Officer and
other Heads of Departments.

The Exchange has inserted new Rule No.126 A in its Rules, Bye-laws & Regulations
pertaining to constitution of the Executive Committee of the Exchange. Accordingly, an
Executive Committee, consisting of three elected directors, three SEBI nominees or
public representatives, Executive Director & CEO and Chief Operating Officer has been
constituted. The Committee considers judicial & quasi matters in which the Governing
Board has powers as an Appellate Authority, matters regarding annulment of
transactions, admission, continuance and suspension of member-brokers, declaration of a
member-broker as defaulter, norms, procedures and other matters relating to arbitration,
fees, deposits, margins and other monies payable by the member-brokers to the
Exchange, etc.

Turnover on the Exchange

• The average daily turnover of the Exchange during the financial year 2000-2001
(April-March), was Rs.3984.19 crores and the average number of daily trades was
5.69 lakhs.
• The average daily turnover of the Exchange in the subsequent two financial years,
i.e., 2001-02 & 2002-03, has declined considerably to Rs. 1248.15 crores and Rs.
1251.29 crores respectively.
• The average number of daily trades recorded during 2001-02 and 2002-03
numbered 5.17 lakhs and 5.63 lakhs respectively.
The average daily turnover and average number of daily trades during the quarter April-
June 2003 were Rs. 1101.05 crores and 5.70 lakhs respectively.
The ban on all deferral products like Borrowing & Lending of Securities Scheme
(BLESS) and Automated Lending & Borrowing Mechanism (ALBM) in the Indian
capital markets by SEBI w.e.f. July 2, 2001, abolition of account period settlements,
introduction of Compulsory Rolling Settlements in all scrip’s traded on the Exchanges
w.e.f. December 31, 2001, etc. has adversely impacted the liquidity in the market and
consequently there is a considerable decline in the average daily turnover at the Exchange
as reflected in above statistics.

34
 4. DATA ANALYSIS AND INTERPRETATION
MARKET EFFICIENCY TEST

4.1 AUTO CORRELATION FUNCTION

S&P CNX NIFTY

CLOSING 31-May-04 1483.6 28-Jul-04 1594.15

DATE
PRICE 1-Jun-04 1507.9 29-Jul-04 1618.7
1-Apr-04 1819.65 2-Jun-04 1535.2 30-Jul-04 1632.3
2-Apr-04 1841.1 3-Jun-04 1495.1 2-Aug-04 1639.05
5-Apr-04 1856.6 4-Jun-04 1521.1 3-Aug-04 1630.6
6-Apr-04 1851.15 7-Jun-04 1542.55 4-Aug-04 1626.55
7-Apr-04 1848.7 8-Jun-04 1550.55 5-Aug-04 1654.95
8-Apr-04 1853.55 9-Jun-04 1548.3 6-Aug-04 1633.4
12-Apr-04 1838.2 10-Jun-04 1544.75 9-Aug-04 1642.6
13-Apr-04 1878.45 11-Jun-04 1508.45 10-Aug-04 1652.15
15-Apr-04 1861.95 14-Jun-04 1481.35 11-Aug-04 1621.6
16-Apr-04 1868.95 15-Jun-04 1501 12-Aug-04 1607.2
17-Apr-04 1868.1 16-Jun-04 1494.75 13-Aug-04 1598.2
19-Apr-04 1844.05 17-Jun-04 1512.05 16-Aug-04 1599.15
20-Apr-04 1844.25 18-Jun-04 1491.2 17-Aug-04 1604.35
21-Apr-04 1873.35 21-Jun-04 1482 18-Aug-04 1581.8
22-Apr-04 1889.55 22-Jun-04 1474.7 19-Aug-04 1609.2
23-Apr-04 1892.45 23-Jun-04 1446.1 20-Aug-04 1590.35
27-Apr-04 1817.25 24-Jun-04 1470.75 23-Aug-04 1578.2
28-Apr-04 1816.55 25-Jun-04 1488.5 24-Aug-04 1591.6
29-Apr-04 1808.95 28-Jun-04 1514.35 25-Aug-04 1595.7
30-Apr-04 1796.1 29-Jun-04 1518.3 26-Aug-04 1610.75
3-May-04 1766.7 30-Jun-04 1505.6 27-Aug-04 1609
4-May-04 1793.1 1-Jul-04 1537.2 30-Aug-04 1628.45
5-May-04 1809.9 2-Jul-04 1537.5 31-Aug-04 1631.75
6-May-04 1832.8 5-Jul-04 1526.85 1-Sep-04 1635.45
7-May-04 1804.45 6-Jul-04 1558.25 2-Sep-04 1629.3
10-May-04 1769.1 7-Jul-04 1566.8 3-Sep-04 1634.1
11-May-04 1699.45 8-Jul-04 1518.15 6-Sep-04 1644
12-May-04 1711.1 9-Jul-04 1553.2 7-Sep-04 1650.15
13-May-04 1717.5 12-Jul-04 1556.95 8-Sep-04 1656.25
14-May-04 1582.4 13-Jul-04 1539.3 9-Sep-04 1649
17-May-04 1388.75 14-Jul-04 1522.75 10-Sep-04 1668.75
18-May-04 1503.95 15-Jul-04 1539.4 13-Sep-04 1675.2
19-May-04 1567.85 16-Jul-04 1558.8 14-Sep-04 1685.55
20-May-04 1543.85 19-Jul-04 1571.6 15-Sep-04 1683.2
21-May-04 1560.2 20-Jul-04 1566.1 16-Sep-04 1705.7
24-May-04 1608.85 21-Jul-04 1581.4 17-Sep-04 1733.65
25-May-04 1606.7 22-Jul-04 1598.1 20-Sep-04 1728.8
26-May-04 1598.8 23-Jul-04 1601.6 21-Sep-04 1750.2
27-May-04 1586.4 26-Jul-04 1618 22-Sep-04 1753.9
28-May-04 1508.75 27-Jul-04 1600.75 23-Sep-04 1726.15

35
24-Sep-04 1722.5 29-Nov-04 1939.65 31-Jan-05 2057.6
27-Sep-04 1717.5 30-Nov-04 1958.8 1-Feb-05 2059.85
28-Sep-04 1700.25 1-Dec-04 1962.05 2-Feb-05 2052.25
29-Sep-04 1727.95 2-Dec-04 1999 3-Feb-05 2079.45
30-Sep-04 1745.5 3-Dec-04 1996.2 4-Feb-05 2077.95
1-Oct-04 1775.15 6-Dec-04 1993.15 7-Feb-05 2055.1
4-Oct-04 1805.65 7-Dec-04 1992.7 8-Feb-05 2055.15
5-Oct-04 1812.45 8-Dec-04 1977.95 9-Feb-05 2070
6-Oct-04 1794.9 9-Dec-04 1989.95 10-Feb-05 2063.35
7-Oct-04 1815.7 10-Dec-04 1969 11-Feb-05 2082.05
8-Oct-04 1820.2 13-Dec-04 1985.35 14-Feb-05 2098.25
9-Oct-04 1817.8 14-Dec-04 2006.8 15-Feb-05 2089.95
11-Oct-04 1807.75 15-Dec-04 2028.7 16-Feb-05 2068.8
12-Oct-04 1786.9 16-Dec-04 2033.2 17-Feb-05 2061.9
14-Oct-04 1794.75 17-Dec-04 2012.1 18-Feb-05 2055.55
15-Oct-04 1795 20-Dec-04 2026.85 21-Feb-05 2043.2
18-Oct-04 1786 21-Dec-04 2044.65 22-Feb-05 2058.4
19-Oct-04 1808.4 22-Dec-04 2035.35 23-Feb-05 2057.1
20-Oct-04 1790.05 23-Dec-04 2045.15 24-Feb-05 2055.3
21-Oct-04 1779.75 24-Dec-04 2062.7 25-Feb-05 2060.9
25-Oct-04 1757.25 27-Dec-04 2062.6 28-Feb-05 2103.25
26-Oct-04 1781.05 28-Dec-04 2071.35 1-Mar-05 2084.4
27-Oct-04 1783.85 29-Dec-04 2069.6 2-Mar-05 2093.25
28-Oct-04 1800.1 30-Dec-04 2059.8 3-Mar-05 2128.85
29-Oct-04 1786.9 31-Dec-04 2080.5 4-Mar-05 2148.15
1-Nov-04 1797.75 3-Jan-05 2115 7-Mar-05 2160.1
2-Nov-04 1813.7 4-Jan-05 2103.75 8-Mar-05 2168.95
3-Nov-04 1837.4 5-Jan-05 2032.2 9-Mar-05 2160.8
4-Nov-04 1834.85 6-Jan-05 1998.35 10-Mar-05 2167.4
5-Nov-04 1852.3 7-Jan-05 2015.5 11-Mar-05 2154
8-Nov-04 1862.8 10-Jan-05 1982 14-Mar-05 2146.35
9-Nov-04 1858.75 11-Jan-05 1952.05 15-Mar-05 2128.95
10-Nov-04 1876.1 12-Jan-05 1913.6 16-Mar-05 2125.55
11-Nov-04 1870.55 13-Jan-05 1954.55 17-Mar-05 2098.5
12-Nov-04 1872.95 14-Jan-05 1931.1 18-Mar-05 2109.15
16-Nov-04 1879 17-Jan-05 1932.9 21-Mar-05 2096.6
17-Nov-04 1888.65 18-Jan-05 1934.05 22-Mar-05 2061.6
18-Nov-04 1892.05 19-Jan-05 1926.65 23-Mar-05 2026.4
19-Nov-04 1872.35 20-Jan-05 1925.3 24-Mar-05 2015.4
22-Nov-04 1873.35 24-Jan-05 1909 28-Mar-05 2029.45
23-Nov-04 1892.6 25-Jan-05 1931.85 29-Mar-05 1983.85
24-Nov-04 1904.05 27-Jan-05 1955 30-Mar-05 1993.7
25-Nov-04 1901.05 28-Jan-05 2008.3 31-Mar-05 2035.65

Year 01-04-2003 to 31-03-2005

Correlations

36
 VAR 01 VAR 02

Pearson
VAR 01 1.000 .791
Correlation

N 248 248

Pearson
VAR 02 .791 1.000
Correlation

N 248 248

S & P C N X N ifty

2400

2200

2000

1800
Closing Price

1600

1400

1200

1000
4/1/2004

8/4/2004

1/1/2005
6/15/2004

8/29/2004

9/23/2004

12/7/2004

2/20/2005

3/17/2005
4/26/2004

5/21/2004

7/10/2004

1/26/2005
10/18/2004

11/12/2004

D a te

37
 BSE Sensex

CLOSING 04/06/2005 4889.00 09/08/2005 5233.21

DATE
PRICE 07/06/2005 4938.15 10/08/2005 5252.05
01/04/2004 5740.85 08/06/2005 4962.63 11/08/2005 5175.16
02/04/2005 5788.08 09/06/2005 4963.75 12/08/2005 5139.77
05/04/2005 5838.02 10/06/2005 4944.64 13/08/2005 5102.92
06/04/2005 5822.42 11/06/2005 4832.71 16/08/2005 5102.37
07/04/2005 5815.13 14/06/2005 4746.01 17/08/2005 5102.94
08/04/2005 5838.45 15/06/2005 4814.85 18/08/2005 5038.28
12/04/2005 5783.79 16/06/2005 4788.80 19/08/2005 5123.65
13/04/2005 5904.52 17/06/2005 4839.88 20/08/2005 5064.66
15/04/2005 5843.97 18/06/2005 4769.99 23/08/2005 5033.69
16/04/2005 5862.82 21/06/2005 4738.62 24/08/2005 5067.39
17/04/2005 5861.63 22/06/2005 4735.86 25/08/2005 5088.56
19/04/2005 5800.54 23/06/2005 4644.00 26/08/2005 5135.45
20/04/2005 5804.81 24/06/2005 4708.55 27/08/2005 5117.01
21/04/2005 5876.42 25/06/2005 4756.39 30/08/2005 5186.45
22/04/2005 5924.18 28/06/2005 4837.60 31/08/2005 5192.08
23/04/2005 5925.58 29/06/2005 4841.38 01/09/2005 5210.85
27/04/2005 5712.28 30/06/2005 4795.46 02/09/2005 5198.72
28/04/2005 5713.09 01/07/2005 4874.05 03/09/2005 5218.46
29/04/2005 5668.43 02/07/2005 4870.58 06/09/2005 5246.23
30/04/2005 5655.09 05/07/2005 4843.77 07/09/2005 5264.67
03/05/2005 5584.99 06/07/2005 4928.59 08/09/2005 5298.16
04/05/2005 5647.15 07/07/2005 4955.97 09/09/2005 5298.23
05/05/2005 5686.19 08/07/2005 4843.84 10/09/2005 5370.05
06/05/2005 5757.30 09/07/2005 4945.48 13/09/2005 5397.46
07/05/2005 5669.58 12/07/2005 4944.54 14/09/2005 5428.77
10/05/2005 5555.84 13/07/2005 4898.99 15/09/2005 5420.09
11/05/2005 5325.90 14/07/2005 4848.30 16/09/2005 5477.68
12/05/2005 5358.35 15/07/2005 4888.19 17/09/2005 5561.15
13/05/2005 5399.47 16/07/2005 4951.17 20/09/2005 5545.82
14/05/2005 5069.87 19/07/2005 4975.40 21/09/2005 5605.93
17/05/2005 4505.16 20/07/2005 4957.88 22/09/2005 5616.87
18/05/2005 4877.02 21/07/2005 4993.76 23/09/2005 5539.48
19/05/2005 5006.10 22/07/2005 5054.29 24/09/2005 5527.75
20/05/2005 4932.11 23/07/2005 5073.34 27/09/2005 5511.81
21/05/2005 4961.57 26/07/2005 5118.17 28/09/2005 5462.61
24/05/2005 5123.23 27/07/2005 5075.88 29/09/2005 5527.56
25/05/2005 5102.22 28/07/2005 5070.29 30/09/2005 5583.61
26/05/2005 5081.95 29/07/2005 5120.45 01/10/2005 5675.54
27/05/2005 5058.55 30/07/2005 5170.32 04/10/2005 5766.30
28/05/2005 4835.39 02/08/2005 5202.53 05/10/2005 5758.67
31/05/2005 4759.62 03/08/2005 5194.63 06/10/2005 5713.75
01/06/2005 4835.12 04/08/2005 5169.07 07/10/2005 5773.66
02/06/2005 4923.69 05/08/2005 5252.78 08/10/2005 5776.85
03/06/2005 4817.99 06/08/2005 5196.99 09/10/2005 5757.93

38
11/10/2005 5717.54 09/12/2005 6304.27 04/02/2005 6618.23
12/10/2005 5676.73 10/12/2005 6233.54 07/02/2005 6535.17
14/10/2005 5713.10 13/12/2005 6268.72 08/02/2005 6544.77
15/10/2005 5686.73 14/12/2005 6325.53 09/02/2005 6593.53
18/10/2005 5679.83 15/12/2005 6402.29 10/02/2005 6577.83
19/10/2005 5738.11 16/12/2005 6420.38 11/02/2005 6633.76
20/10/2005 5673.02 17/12/2005 6346.48 14/02/2005 6679.33
21/10/2005 5641.06 20/12/2005 6403.00 15/02/2005 6670.06
25/10/2005 5581.49 21/12/2005 6451.30 16/02/2005 6607.78
26/10/2005 5651.09 22/12/2005 6413.66 17/02/2005 6589.29
27/10/2005 5662.87 23/12/2005 6441.85 18/02/2005 6584.32
28/10/2005 5715.62 24/12/2005 6498.06 21/02/2005 6534.68
29/10/2005 5672.27 27/12/2005 6513.03 22/02/2005 6589.41
01/11/2005 5704.10 28/12/2005 6563.48 23/02/2005 6582.50
02/11/2005 5754.76 29/12/2005 6567.94 24/02/2005 6574.21
03/11/2005 5842.54 30/12/2005 6522.54 25/02/2005 6569.72
04/11/2005 5832.88 31/12/2005 6602.69 28/02/2005 6713.86
05/11/2005 5891.36 03/01/2005 6679.20 01/03/2005 6651.08
08/11/2005 5930.47 04/01/2005 6651.01 02/03/2005 6686.89
09/11/2005 5929.60 05/01/2005 6458.84 03/03/2005 6784.72
10/11/2005 5973.75 06/01/2005 6367.39 04/03/2005 6849.48
11/11/2005 5954.31 07/01/2005 6420.46 07/03/2005 6878.98
12/11/2005 5964.01 10/01/2005 6308.54 08/03/2005 6915.09
16/11/2005 5996.70 11/01/2005 6222.87 09/03/2005 6892.82
17/11/2005 6016.58 12/01/2005 6102.74 10/03/2005 6907.65
18/11/2005 6025.47 13/01/2005 6221.06 11/03/2005 6853.73
19/11/2005 5961.71 14/01/2005 6173.82 14/03/2005 6810.04
22/11/2005 5963.80 17/01/2005 6194.07 15/03/2005 6752.45
23/11/2005 6009.86 18/01/2005 6192.35 16/03/2005 6746.88
24/11/2005 6035.95 19/01/2005 6173.32 17/03/2005 6669.52
25/11/2005 6035.03 20/01/2005 6183.24 18/03/2005 6700.34
29/11/2005 6157.77 24/01/2005 6106.43 21/03/2005 6656.69
30/11/2005 6234.29 25/01/2005 6162.98 22/03/2005 6535.45
01/12/2005 6227.83 27/01/2005 6239.43 23/03/2005 6454.46
02/12/2005 6328.43 28/01/2005 6419.09 24/03/2005 6442.87
03/12/2005 6322.76 31/01/2005 6555.94 28/03/2005 6510.74
06/12/2005 6322.50 01/02/2005 6552.47 29/03/2005 6367.86
07/12/2005 6316.28 02/02/2005 6530.06 30/03/2005 6381.40
08/12/2005 6261.52 03/02/2005 6619.97 31/03/2005 6492.82

Year 01-04-2003 to 31-03-2005

39
 Correlations

VAR 01 VAR 02
Pearson
VAR 01 1.000 .784
Correlation
N 230 230
Pearson
VAR 02 .784 1.000
Correlation
N 230 230

BSE SENSEX
7500.00

7000.00

6500.00
CLOSING PRICE

6000.00

5500.00

5000.00

4500.00

4000.00
A pr 0 4 M ay Jun Jul A ug S ep Oct Nov D ec Jan 05 F eb

There are two methods to test efficiency of stock market Auto correlation and run test.
Auto correlation of both national stock exchange and Bombay stock exchange are high so

40
it shows that Indian stock markets are inefficient. Index prices are highly fluctuating year
by year this is due to speculation and financial institutional investment in India, hence
individual investor can beat the stock market by application of efficient market
hypothesis theory and fundamental analysis by using historical data to predict future
stock prices

Auto correlation of past 4years as fallows

BSE NSE
Year 2000-2001 0.255 0.214
Year 2001-2002 0.532 0.603
Year2002-2003 0.065 -0.182
Year 2003-2004 0.784 0.791

From the above table it is clear that Indian stock market is inefficient because of auto
correlation values for 1/4/2003to 3/3/2004 and 1/4/2004to 31/3/2005 are high for BSE
0.784 for NSE 0.791 this shows volatility and highly fluctuating closing prices of index
so chance to beat market by using past data you can make money and this shows that
volatility of Indian stock market and speculative market.

RUN TEST

5740.85 14 + 5838.02 + 61 + 5815.13 - 76 -

5788.08 + 71 - 5822.42 - 67 + 5838.45 + 67 -

41
5783.79 - 39 + 4843.77 - 92 - 5527.75 - 27 -
5904.52 + 75 - 4928.59 + 77 + 5511.81 - 24 -
5843.97 - 28 + 4955.97 + 83 - 5462.61 - 14 -
5862.82 + 91 - 4843.84 - 48 + 5527.56 + 5 +
5861.63 - 33 + 4945.48 + 60 + 5583.61 + 12 +
5800.54 - 77 - 4944.54 - 83 - 5675.54 + 78 +
5804.81 + 50 + 4898.99 - 59 - 5766.30 + 79 -
5876.42 + 78 - 4848.30 - 49 - 5758.67 - 38 -
5924.18 + 15 + 4888.19 + 1 + 5713.75 - 26 +
5925.58 + 22 - 4951.17 + 32 + 5773.66 + 66 -
5712.28 - 5 + 4975.40 + 84 - 5776.85 + 50 -
5713.09 + 51 + 4957.88 - 16 + 5757.93 - 42 +
5668.43 - 75 + 4993.76 + 79 + 5717.54 - 63 -
5655.09 - 91 - 5054.29 + 83 - 5676.73 - 30 +
5584.99 - 28 + 5073.34 + 62 + 5713.10 + 99 -
5647.15 + 72 - 5118.17 + 70 - 5686.73 - 90 -
5686.19 + 25 + 5075.88 - 17 + 5679.83 - 51 +
5757.30 + 79 + 5070.29 - 70 - 5738.11 + 98 -
5669.58 - 79 - 5120.45 + 67 - 5673.02 - 62 -
5555.84 - 27 - 5170.32 + 39 - 5641.06 - 15 +
5325.90 - 26 + 5202.53 + 9 + 5581.49 - 63 +
5358.35 + 93 - 5194.63 - 27 + 5651.09 + 98 -
5399.47 + 2 + 5169.07 - 87 + 5662.87 + 46 +
5069.87 - 39 + 5252.78 + 95 - 5715.62 + 46 +
4505.16 - 41 + 5196.99 - 32 + 5672.27 - 48 -
4877.02 + 69 + 5233.21 + 61 - 5704.10 + 27 +
5006.10 + 75 - 5252.05 + 0 + 5754.76 + 57 -
4932.11 - 49 + 5175.16 - 86 - 5842.54 + 56 -
4961.57 + 93 - 5139.77 - 22 - 5832.88 - 13 +
5123.23 + 72 - 5102.92 - 20 + 5891.36 + 25 +
5102.22 - 67 - 5102.37 - 82 - 5930.47 + 75 -
5081.95 - 23 - 5102.94 + 28 + 5929.60 - 54 +
5058.55 - 15 + 5038.28 - 41 - 5973.75 + 87 -
4835.39 - 90 - 5123.65 + 2 + 5954.31 - 69 -
4759.62 - 25 + 5064.66 - 18 + 5964.01 + 16 +
4835.12 + 78 - 5033.69 - 70 - 5996.70 + 64 -
4923.69 + 46 - 5067.39 + 7 + 6016.58 + 5 +
4817.99 - 13 + 5088.56 + 38 + 6025.47 + 8 +
4889.00 + 54 - 5135.45 + 50 + 5961.71 - 30 +
4938.15 + 48 - 5117.01 - 79 + 5963.80 + 39 -
4962.63 + 27 - 5186.45 + 86 - 6009.86 + 9 +
4963.75 + 3 + 5192.08 + 27 + 6035.95 + 90 -
4944.64 - 33 + 5210.85 + 33 - 6035.03 - 80 -
4832.71 - 69 - 5198.72 - 10 + 6157.77 + 26 -
4746.01 - 45 + 5218.46 + 56 + 6234.29 + 9 +
4814.85 + 73 - 5246.23 + 71 + 6227.83 - 62 -
4788.80 - 22 + 5264.67 + 97 - 6328.43 + 47 +
4839.88 + 99 - 5298.16 + 46 + 6322.76 - 99 -
4769.99 - 68 - 5298.23 + 57 - 6322.50 - 30 +
4738.62 - 48 + 5370.05 + 13 + 6316.28 - 57 -
4735.86 - 100 - 5397.46 + 35 - 6261.52 - 27 +
4644.00 - 40 - 5428.77 + 4 + 6304.27 + 96 -
4708.55 + 3 + 5420.09 - 11 + 6233.54 - 32 +
4756.39 + 97 - 5477.68 + 38 - 6268.72 + 54 -
4837.60 + 0 + 5561.15 + 5 + 6325.53 + 10 -
4841.38 + 66 + 5545.82 - 98 - 6402.29 + 8 +
4795.46 - 77 - 5605.93 + 64 - 6420.38 + 91 +
4874.05 + 52 + 5616.87 + 3 + 6346.48 - 94 -
4870.58 - 53 + 5539.48 - 41 - 6403.00 + 49 +

42
6451.30 + 55 + 6162.98 + 43 - 6651.08 - 27 +
6413.66 - 68 + 6239.43 + 20 + 6686.89 + 36 -
6441.85 + 91 - 6419.09 + 98 - 6784.72 + 24 +
6498.06 + 7 + 6555.94 + 44 + 6849.48 + 99 -
6513.03 + 72 - 6552.47 - 85 - 6878.98 + 45 +
6563.48 + 11 + 6530.06 - 27 - 6915.09 + 77 -
6567.94 + 25 - 6619.97 + 14 + 6892.82 - 1 +
6522.54 - 7 + 6618.23 - 99 - 6907.65 + 9 -
6602.69 + 76 - 6535.17 - 8 + 6853.73 - 8 -
6679.20 + 31 + 6544.77 + 61 - 6810.04 - 3 +
6651.01 - 80 - 6593.53 + 13 + 6752.45 - 94 -
6458.84 - 15 + 6577.83 - 100 - 6746.88 - 34 +
6367.39 - 94 - 6633.76 + 51 - 6669.52 - 41 +
6420.46 + 15 + 6679.33 + 14 + 6700.34 + 97 -
6308.54 - 39 - 6670.06 - 23 + 6656.69 - 92 -
6222.87 - 12 + 6607.78 - 91 - 6535.45 - 27 +
6102.74 - 90 - 6589.29 - 25 + 6454.46 - 47 +
6221.06 + 36 + 6584.32 - 97 - 6442.87 - 89 -
6173.82 - 95 - 6534.68 - 53 - 6510.74 + 61 -
6194.07 + 20 + 6589.41 + 18 + 6367.86 - 46 -
6192.35 - 96 - 6582.50 - 41 - 6381.40 + 43 +
6173.32 - 87 - 6574.21 - 11 + 6492.82 + 74 -
6183.24 + 13 + 6569.72 - 33 - 5740.85 123 163
6106.43 - 47 - 6713.86 + 8 +

Run test is used to test efficiency of market this can done by generating random numbers
and calculating total runs. This run is compared with runs obtained from nifty and sensex
closing prices. The study shows that random numbers generated for particular period
from 1/4/2004 to 31/3/2005 is 123 runs but actual run generated by stock closing prices
are 163 run, this shows large difference between random number run and closing price
run it defines inefficiency of market. If difference between them is less it means market is
efficient

43
 4.2 Fundamental Analysis
COMPANY DATE CLOSING PRICE RETURN INDUSTRY
31/03/2005 111.55
CUMMINS INDIA 6%
1/4/2004 105.35
SENSEX BETA 0.5492
BSE INDEX RETURN 7.930448
NIFTY BETA 0.4983
NSE INDEX RETURN 5.660688
VALUATION RATIOS Price Earning (P/E) 20.13 14.97
EPS 7.06

Return of the company (6%) is less than the index return (7%), so 85% explained by
market factor, rest not explained by other factors even though P/E Ratio of the company
is more than the P/E Ratio of the Industry; ie the company is performing well

COMPANY DATE CLOSING PRICE RETURN

1/4/2005 66.85
VIJAYA BANK 2%
1/4/2004 65.45
SENSEX BETA 1.3789
BSE INDEX RETURN 19.911316
NIFTY BETA 1.3355
NSE INDEX RETURN 15.17128
VALUATION RATIOS Price Earning (P/E) 7.32 6.14
EPS 8.8

Return of the bank (2%) is less than the index return (19.91%), so 10% explained by
market factor, rest not explained properly by other factors even though P/E Ratio of the
bank is more than the P/E Ratio of the Industry;, the bank is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 56.25
GTN textiles 51%
1/4/2004 37.35
SENSEX BETA 1.131
BSE INDEX RETURN 16.33164
NIFTY BETA 1.0591

44
 NSE INDEX RETURN 11.65
VALUATION RATIOS Price Earning (P/E) 17.58 14.51
EPS 17.30

Return of the company (51%) is more than the index return (16.33%), so 32% explained
by market factor. The excess return of 68% is due the other factors i.e. good performance
of the company. P/E Ratio of the company is more than the P/E Ratio of the Industry.

C0MPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 155.15
Kochi refineries -27%
1/4/2004 213.15
SENSEX BETA 1.0645
BSE INDEX RETURN 15.37138
NIFTY BETA 1.0443
NSE INDEX RETURN 11.863248
VALUATION RATIOS Price Earning (P/E) 2.55 8.21
EPS 60.8

Return of the company (-27%) is less than the index return (15.37%), so it is not
explained by market factor, it is totally explained by other factors P/E Ratio of the
company is less than the P/E Ratio of the Industry, the company is not performing well

C0MPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 65.2
Nilkamal plastics 42%
1/4/2004 46
SENSEX BETA 0.8915
BSE INDEX RETURN 12.87326
NIFTY BETA 0.8578
NSE INDEX RETURN 9.744608
VALUATION RATIOS Price Earning (P/E) 5.7 4.85
EPS 17.50

Return of the company (42%) is more than the index return (12.87%), so 30% is
explained by market factor. the excess return of 70% is due to other factors like the good
performance of the company. P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 715.1
Sterlite inds 35%
1/4/2004 530.67
SENSEX BETA 0.6268
BSE INDEX RETURN 9.050992
NIFTY BETA 0.5974
NSE INDEX RETURN 6.786464
VALUATION RATIOS Price Earning (P/E) 30.25 19
EPS 20.96

45
Return of the company (35%) is more than the index return (9%), so 25% explained by
market factors. The excess return of 75% is due to other factors like the good
performance of the company. P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 470.4
Tata InfoTech 12%
1/4/2004 418.95
SENSEX BETA 1.1367
BSE INDEX RETURN 16.413948
NIFTY BETA 1.0693
NSE INDEX RETURN 12.147248
VALUATION RATIOS Price Earning (P/E) 10.75 13.43
EPS 34.07

Return of the company (12%) is less than the index return (16.41%), so 75% explained
by market factor, 25% not explained by other factors P/E Ratio of the company is less
than the P/E Ratio of the Industry; the company is not performing well.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 357.4
Tata power -7%
1/4/2004 383.85
SENSEX BETA 1.5185
BSE INDEX RETURN 21.92714
NIFTY BETA 1.4015
NSE INDEX RETURN 15.92104
VALUATION RATIOS Price Earning (P/E) 17.79 25
EPS 18.68

Return of the company (-7%) is less than the index return (22%), so it is not explained by
market factor, it is totally explained by other factors P/E Ratio of the company is less
than the P/E Ratio of the Industry, the company is not performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 393.3
Punjab national bank -1%
1/4/2005 396.3
SENSEX BETA 1.4434
BSE INDEX RETURN 20.842696
NIFTY BETA 1.3683
NSE INDEX RETURN 15.543888
VALUATION RATIOS Price Earning (P/E) 8.79 6.14
EPS 44.40

46
Return of the bank (-1%) is less than the index return (21%), so it is not explained by
market factors, it is explained by other factors P/E Ratio of the bank is more than the P/E
Ratio of the Industry, the bank is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 265.1
Havells india ltd 130%
1/4/2004 115.05
SENSEX BETA 0.9417
BSE INDEX RETURN 13.598148
NIFTY BETA 0.8951
NSE INDEX RETURN 10.168336
VALUATION RATIOS Price Earning (P/E) 11.68 14.8
EPS 22.09

Return of the company (130%) is more than the index return (14%), so 10% explained by
market factor. The excess return of 90% is due to other factors even though P/E Ratio of
the company is less than the P/E Ratio of the Industry;

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 341.2
Bombay dyeing 128%
1/4/2004 149.85
SENSEX BETA 1.1927
BSE INDEX RETURN 17.222588
NIFTY BETA 1.1426
NSE INDEX RETURN 12.979936
VALUATION RATIOS Price Earning (P/E) 18.35 14.51
EPS 7.19

Return of the company (128%) is more than the index return (17%), so 13% explained by
market factor. The excess return of 87% is due to other factors like the good performance
of the company. P/E Ratio of the company is more than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 230.15
Chennai Petro 54%
1/4/2004 149.05
SENSEX BETA 1.4465
BSE INDEX RETURN 20.88746
NIFTY BETA 1.4101
NSE INDEX RETURN 16.018736
VALUATION RATIOS Price Earning (P/E) 5.71 6.98
EPS

47
Return of the company (54%) is more than the index return (21%), so 39% it is explained
by market factor. The excess return of 61% is due to other factors. P/E Ratio of the
company is less than the P/E Ratio of the Industry;

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 143.5
Igaarashi motors 109%
1/4/2004 68.6
SENSEX BETA 0.2778
BSE INDEX RETURN 4.011432
NIFTY BETA 0.2865
NSE INDEX RETURN 3.25464
VALUATION RATIOS Price Earning (P/E) 39.86 15.87
EPS

Return of the company (109%) is more than the index return (4%), so 3% explained by
market factor. The excess return of 97% is due to other factors i.e. the good performance
of the company. P/E Ratio of the company is more than the P/E Ratio of the Industry

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 159.5
Punjab tractors -32%
1/4/2004 234.35
SENSEX BETA 0.7034
BSE INDEX RETURN 10.157096
NIFTY BETA 0.64225
NSE INDEX RETURN 7.29596
VALUATION RATIOS Price Earning (P/E) 15.41 15.08
EPS 10.4

Return of the company (-32%) is less than the index return (10%), so it is totally
explained by other factors, P/E Ratio of the company is more than the P/E Ratio of the
Industry, and ie the company is performing well.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

2005 137.35
Godrej industries 11%
2004 123.35
SENSEX BETA 0.8571
BSE INDEX RETURN 12.376524
NIFTY BETA 0.8269
NSE INDEX RETURN 9.393584
VALUATION RATIOS Price Earning (P/E) 15.30
EPS 8.95

48
Return of the company (11%) is less than the index return (12%), so 90% explained by
market factor, 10% not explained properly by other factors

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

2005 193.3
Solectron centum 33%
2004 144.85
SENSEX BETA 0.9526
BSE INDEX RETURN 13.755544
NIFTY BETA 0.895
NSE INDEX RETURN 10.1672
VALUATION RATIOS Price Earning (P/E) 18.39
EPS 5.56

Return of the company (33%) is more than the index return (14%), so 42 % it is
explained by market factor. The excess return of 58% is due to other factors i.e. the good
performance of the company

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

2005 157.65
Info media India 5%
2004 150.15
SENSEX BETA 0.4343
BSE INDEX RETURN 6.271292
NIFTY BETA 0.4117
NSE INDEX RETURN 4.676912
VALUATION RATIOS Price Earning (P/E) 41.34 13.43
EPS 4.10

Return of the company (5%) is less than the index return (6%), so 85% explained by
market factor, 15% not explained properly by other factors even though P/E Ratio of the
company is more than the P/E Ratio of the Industry;, i.e. the company is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

Mar-05 700
Sundaram Clayton 60%
Apr-04 438.8
SENSEX BETA 0.1225
BSE INDEX RETURN 1.7689
NIFTY BETA 0.1051
NSE INDEX RETURN 1.193936
VALUATION RATIOS Price Earning (P/E) 24.69 15.87
EPS 28.83

49
Return of the company (60%) is more than the index return (2%), so 3% it is explained
by market factor. The excess return of 97% is due to other factors i.e. the good
performance of the company, P/E Ratio of the company is more than the P/E Ratio of the
Industry;.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

Mar-05 348.45
Corporation Bank -5%
Apr-04 368.2
SENSEX BETA 1.0185
BSE INDEX RETURN 14.70714
NIFTY BETA 0.977
NSE INDEX RETURN 11.09872
VALUATION RATIOS Price Earning (P/E) 12.43 6.14
EPS 28

Return of the bank (-5%) is less than the index return (15%), so not explained by market
factor, it is totally explained by other factors even though P/E Ratio of the bank is more
than the P/E Ratio of the Industry; i.e. the bank is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

Mar-05 200.4
CANARA BANK 21%
Apr-04 165.5
SENSEX BETA 1.275
BSE INDEX RETURN 18.411
NIFTY BETA 1.2218
NSE INDEX RETURN 13.879648
VALUATION RATIOS Price Earning (P/E) 6.26 6.14
EPS 33.93

Return of the bank (21%) is more than the index return (18.5%), so 85% it is explained
by market factor. The excess return of 15 % is due to the other factors i.e. good
performance of the bank, P/E Ratio of the bank is more than the P/E Ratio of the
Industry;.

COMPANY DATE CLOSING PRICE RETURN

31/03/2005 401.6
GUJARAT AMBUJA 33%
1/4/2004 301.15
SENSEX BETA 1.0242
BSE INDEX RETURN 14.789448
NIFTY BETA 0.9353
NSE INDEX RETURN 10.625008
VALUATION RATIOS Price Earning (P/E) 16.48 28.47
EPS 24.11

50
Return of the company (33%) is more than the index return (15%), so 45% it is properly
explained by market factor. The excess return of 55% is due to other factors i.e. the good
performance of the company; P/E Ratio of the company is less than the P/E Ratio of the
Industry;

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 86.1
KAKATIYA CEMENT
SUGAR AND IND LTD 126%
1/4/2004 38.15
SENSEX BETA 1.2922
BSE INDEX RETURN 18.659368
NIFTY BETA 1.2411
NSE INDEX RETURN 14.098896
VALUATION RATIOS Price Earning (P/E) 6.4 28.47
EPS 23.50

Return of the company (126%) is more than the index return (18.65%), so 15% it is
explained by market factor. The excess return of 85% is due the other factors i.e. good
performance of the company. Even though P/E Ratio of the company is less than the P/E
Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 2043.3
MICO 51%
1/4/2004 1351.29
SENSEX BETA 0.5816
BSE INDEX RETURN 8.398304
NIFTY BETA 0.5987
NSE INDEX RETURN 6.801232
VALUATION RATIOS Price Earning (P/E) 18.49 15.87
EPS 114.07

Return of the company (51%) is more than the index return (8%), so 15% it is explained
by market factor. The excess return 85% is explained other factors like the good
performance of the company; P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 63.7
BHARAT GEARS 173%
1/4/2004 23.3
SENSEX BETA 0.6044
BSE INDEX RETURN 8.727536
NIFTY BETA 0.6263
NSE INDEX RETURN 7.114768
VALUATION RATIOS Price Earning (P/E) 4.12 15.87
EPS 0

51
Return of the company (173%) is more than the index return (9%), so 5% explained by
market factor. The excess return 95% is explained by other factors due to the good
performance of the company, even though P/E Ratio of the company is less than the P/E
Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 59.45
Aegis Logistics 234%
1/4/2004 17.8
SENSEX BETA 0.8935
BSE INDEX RETURN 12.90214
NIFTY BETA 0.8649
NSE INDEX RETURN 9.825264
VALUATION RATIOS Price Earning (P/E) 7.59 12.26
EPS 5.71

Return of the company (234%) is more than the index return (13%), so 6% it is explained
by market factor. The excess return 94% is explained by other factors due to the good
performance of the company even though P/E Ratio of the company is less than the P/E
Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 95.6
Ballarpur Inds. 46%
1/4/2004 65.3
SENSEX BETA 0.9667
BSE INDEX RETURN 13.959148
NIFTY BETA 0.9124
NSE INDEX RETURN 10.364864
VALUATION RATIOS Price Earning (P/E) 10.31 9.91
EPS 10.09

Return of the company (46%) is more than the index return (14%), so 30% it is explained
by market factor. The excess return 70% is explained by other factors due to the good
performance of the company P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 231.7
Titan Inds. 108%
1/4/2004 111.15
SENSEX BETA 0.937
BSE INDEX RETURN 13.53028
NIFTY BETA 0.9118
NSE INDEX RETURN 10.358048
VALUATION RATIOS Price Earning (P/E) 39.98 25.78
EPS 7.70

52
Return of the company (108%) is more than the index return (13.5%), so it is 12.5%
explained by market factor. The excess return 87.5% is explained by other factors due to
the good performance of the company. P/E Ratio of the company is more than the P/E
Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 69
TVS Motor Co. -24%
1/4/2004 90.95
SENSEX BETA 1
BSE INDEX RETURN 14.44
NIFTY BETA 1
NSE INDEX RETURN 11.36
VALUATION RATIOS Price Earning (P/E) 14.76 14.08
EPS 5.52

Return of the company (-24%) is less than the index return (14.5%), so it is not explained
by market factor, it is totally explained by other factors even though P/E Ratio of the
company is more than the P/E Ratio of the Industry;, the company is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 589.85
I-Flex Solutions 0.00271993
1/4/2004 588.25
SENSEX BETA 1.0348
BSE INDEX RETURN 14.942512
NIFTY BETA 0.9237
NSE INDEX RETURN 10.493232
VALUATION RATIOS Price Earning (P/E) 24.622.35 23.28
EPS 26.4

Return of the company (1%) is less than the index return (15%), so 6% explained by
market factor, rest not explained by other factors even though P/E Ratio of the company
is more than the P/E Ratio of the Industry; the company is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 160
Indian CardCloth 108%
1/4/2004 76.95
SENSEX BETA 0.7262
BSE INDEX RETURN 10.486328
NIFTY BETA 0.6934
NSE INDEX RETURN 7.877024
VALUATION RATIOS Price Earning (P/E) 6.55 14.51
EPS 20.29

Return of the company (108%) is more than the index return (10.5%), so 10% it is
explained by market factor. The excess return 90% is explained by other factors due to

53
the good performance of the company. Even though P/E Ratio of the company is less
than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 88.9
SRF 135%
1/4/2004 37.8
SENSEX BETA 1.4626
BSE INDEX RETURN 21.119944
NIFTY BETA 1.3862
NSE INDEX RETURN 15.747232
VALUATION RATIOS Price Earning (P/E) 10.52 15.87
EPS 5.7

Return of the company (135%) is more than the index return (21%), so 16% it is
explained by market factor. The excess return 84% is explained by other factors due to
the good performance of the company. Even though P/E Ratio of the company is less
than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 73.6
Suprajit Engg. 36%
1/4/2004 54.1
SENSEX BETA 0.9154
BSE INDEX RETURN 13.218376
NIFTY BETA 0.8505
NSE INDEX RETURN 9.66168
VALUATION RATIOS Price Earning (P/E) 8.47 16.64
EPS 3.5

Return of the company (36%) is more than the index return (13%), so 36% it is explained
by market factor. The excess return 64% is explained by other factors even though P/E
Ratio of the company is less than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 54.85
Pritish Nandy
Communications Ltd 23%
1/4/2004 44.5
SENSEX BETA 1.1534
BSE INDEX RETURN 16.655096
NIFTY BETA 1.0979
NSE INDEX RETURN 12.472144
VALUATION RATIOS Price Earning (P/E) 14.49 6.86
EPS 8

Return of the company (23%) is more than the index return (17%), so it is 74% explained
by market factor. The excess return 26%is explained by other factors due to the good

54
performance of the company, P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 337.35
Unitech 268%
1/4/2004 91.65
SENSEX BETA 0.0554
BSE INDEX RETURN 0.72
NIFTY BETA 0.0139
NSE INDEX RETURN 0
VALUATION RATIOS Price Earning (P/E) 14.49 13.43
EPS 11.30

Return of the company (268%) is more than the index return (1%), so 1% it is explained
by market factor. The excess return 99% is explained by other factors due to the good
performance of the company. P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 770.45
Pantaloon Retail 165%
1/4/2004 290.25
SENSEX BETA 0.6428
BSE INDEX RETURN 9.282032
NIFTY BETA 0.6474
NSE INDEX RETURN 7.354464
VALUATION RATIOS Price Earning (P/E) 49.89 76.99
EPS 15.54

Return of the company (165%) is more than the index return (9%), so 5% it is explained
by market factor. The excess return 95% is explained by other factors due to the good
performance of the company. Even though P/E Ratio of the company is less than the P/E
Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 463
Cadila Health -1%
1/4/2004 468.65
SENSEX BETA 0.8442
BSE INDEX RETURN 12.190248
NIFTY BETA 0.7688
NSE INDEX RETURN 8.733568
VALUATION RATIOS Price Earning (P/E) 22.13 23.98
EPS 22.6

55
Return of the company (-1%) is less than the index return (12%), so it is not explained by
market, it is explained by other factors P/E Ratio of the company is less than the P/E
Ratio of the Industry, the company is not performing well.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 61.25
Alok Inds. 16%
1/4/2004 52.9
SENSEX BETA 0.8355
BSE INDEX RETURN 12.06462
NIFTY BETA 0.82
NSE INDEX RETURN 9.3152
VALUATION RATIOS Price Earning (P/E) 9.02 14.51
EPS 6.8

Return of the company (16%) is more than the index return (12%), so 75% it is properly
explained by market factors. The excess return 25% is explained by other factors even
though P/E Ratio of the company is less than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 156.55
Matrix Labs. 10%
1/4/2004 142.47
SENSEX BETA 0.3767
BSE INDEX RETURN 5.439548
NIFTY BETA 0.363
NSE INDEX RETURN 4.12368
VALUATION RATIOS Price Earning (P/E) 18.89 23.98
EPS 8.8

Return of the company (10%) is more than the index return (5%), so 50% it is explained
by market factors. The excess return 50% is explained by other factors even though P/E
Ratio of the company is less than the P/E Ratio of the Industry;, the company is not
performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 135.4
Dhampur Sugar 427%
1/4/2004 25.7
SENSEX BETA 1.3206
BSE INDEX RETURN 19.069464
NIFTY BETA 1.2521
NSE INDEX RETURN 14.223856
VALUATION RATIOS Price Earning (P/E) 16.73 10.63
EPS 9.05

Return of the company (427%) is more than the index return (19%) so 4% it is explained
by market factor. The excess return 96% is explained by other factors due to the good

56
performance of the company P/E Ratio of the company is more than the P/E Ratio of the
Industry;, the company is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 89
Balaji Telefilms 3%
1/4/2004 86.05
SENSEX BETA 1.1093
BSE INDEX RETURN 16.018292
NIFTY BETA 1.0356
NSE INDEX RETURN 11.764416
VALUATION RATIOS Price Earning (P/E) 17.61 12.50
EPS 6.3

Return of the company (3%) is less than the index return (16%), so 19% explained by
market factor. Rest not explained properly by other factors Even though P/E Ratio of the
company is more than the P/E Ratio of the Industry;, the company is performing well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 29.85
Chambal Fert. 57%
1/4/2004 19.05
SENSEX BETA 0.7776
BSE INDEX RETURN 11.228544
NIFTY BETA 0.7731
NSE INDEX RETURN 8.782416
VALUATION RATIOS Price Earning (P/E) 8.2 7.47
EPS 3.5

Return of the company (57%) is more than the index return (11%), so 19% it is explained
by market. The excess return 81% is explained by other factors due to the good
performance of the company, P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 59.75
Adani Exports 45%
1/4/2004 41.29
SENSEX BETA 1.0144
BSE INDEX RETURN 14.647936
NIFTY BETA 0.9562
NSE INDEX RETURN 10.862432
VALUATION RATIOS Price Earning (P/E) 25.81 14.51
EPS 2.38

Return of the company (45%) is more than the index return (15%), so 33% it is explained
by market factor. The excess return 67% is explained by other factors due to the good

57
performance of the company, P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 1229.2
Aventis Pharma 72%
1/4/2004 715.45
SENSEX BETA 0.5654
BSE INDEX RETURN 8.164376
NIFTY BETA 0.5501
NSE INDEX RETURN 6.249136
VALUATION RATIOS Price Earning (P/E) 20.21 23.98
EPS 61

Return of the company (72%) is more than the index return (8%), so 11% explained by
market factor. The excess return 89% is explained by other factors due the even though
P/E Ratio of the company is less than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 222.1
Nicholas Piramal 45%
1/4/2004 152.71
SENSEX BETA 0.663
BSE INDEX RETURN 9.57372
NIFTY BETA 0.5927
NSE INDEX RETURN 6.733072
VALUATION RATIOS Price Earning (P/E) 50.7 23.98
EPS 4.7

Return of the company (45%) is more than the index return (10%), so 22% explained by
market factor. The excess return 78% is explained by other factors due to the good
performance of the company, P/E Ratio of the company is more than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 678.4
Gillette India 26%
1/4/2004 539.1
SENSEX BETA 0.6376
BSE INDEX RETURN 9.206944
NIFTY BETA 0.6017
NSE INDEX RETURN 6.835312
VALUATION RATIOS Price Earning (P/E) 37.85 28
EPS 18.55

Return of the company (26%) is more than the index return (9%), so 34% explained by
market. The excess return 66% is explained by other factors due to the good performance
of the company, P/E Ratio of the company is more than the P/E Ratio of the Industry.

58
 COMPANY DATE CLOSING PRICE RETURN INDUSTRY
31/03/2005 719.75
Glaxo (India) Ltd 18%
1/4/2004 607.4
SENSEX BETA 0.4805
BSE INDEX RETURN 6.93842
NIFTY BETA 0.4575
NSE INDEX RETURN 5.1972
VALUATION RATIOS Price Earning (P/E) 25.48 23.98
EPS 28.97

Return of the company (18%) is more than the index return (7%), so 39% explained by
market. The excess return 61% is explained by other factors due to the good performance
of the company, P/E Ratio of the company is more than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 1047.2
Jindal Steel 101%
1/4/2004 520.65
SENSEX BETA 1.2154
BSE INDEX RETURN 17.550376
NIFTY BETA 1.1347
NSE INDEX RETURN 12.890192
VALUATION RATIOS Price Earning (P/E) 5.69 7.2
EPS

Return of the company (101%) is more than the index return (18%), so 18% explained by
market factor. The excess return 82% is explained by other factors even though P/E Ratio
of the company is less than the P/E Ratio of the Industry. The company is performing
well

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 371.25
Patni Computer 73%
1/4/2004 214
SENSEX BETA 0.665
BSE INDEX RETURN 9.6026
NIFTY BETA 0.6057
NSE INDEX RETURN 6.880752
VALUATION RATIOS Price Earning (P/E) 19.74 23.28
EPS 18.08

Return of the company (73%) is more than the index return (10%), so 14% explained by
market factor. The excess return 86% is explained by other factors P/E Ratio of the
company is less than the P/E Ratio of the Industry. The company is performing well.

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 COMPANY DATE CLOSING PRICE RETURN INDUSTRY
31/03/2005 367.65
Mastek 80%
1/4/2004 204.2
SENSEX BETA 1.1228
BSE INDEX RETURN 16.213232
NIFTY BETA 1.021
NSE INDEX RETURN 11.59856
VALUATION RATIOS Price Earning (P/E) 12.28 23.28
EPS 29.24

Return of the company (80%) is more than the index return (16%), so 20% properly
explained by market factor. The excess return 80% is explained by other factors the, P/E
Ratio of the company is less than the P/E Ratio of the Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 370.1
Wockhardt 37%
1/4/2004 270.2
SENSEX BETA 0.4991
BSE INDEX RETURN 7.207004
NIFTY BETA 0.4688
NSE INDEX RETURN 5.325568
VALUATION RATIOS Price Earning (P/E) 19.73 23.98
EPS 18.08

Return of the company (37%) is more than the index return (7%), so 19% explained by
market factors. The excess return 81% is explained by other factors even though P/E
Ratio of the company is less than the P/E Ratio of the Industry.

DATE CLOSING PRICE RETURN

31/03/2005 524.45
Tata Tea 54%
1/4/2004 340.15
SENSEX BETA 0.9957
BSE INDEX RETURN 14.377908
NIFTY BETA 0.9484
NSE INDEX RETURN 10.773824
VALUATION RATIOS Price Earning (P/E) 21.85 28.45
EPS

Return of the company (54%) is more than the index return (14%), so 26% explained by
market factor. The excess return 74% is explained by other factors due the good
performance of the company, P/E Ratio of the company is less than the P/E Ratio of the
Industry

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 COMPANY DATE CLOSING PRICE RETURN INDUSTRY
31/03/2005 152.9
Hotel Leela Ven. 184%
1/4/2004 53.8
SENSEX BETA 1.3149
BSE INDEX RETURN 18.987156
NIFTY BETA 1.2527
NSE INDEX RETURN 14.230672
VALUATION RATIOS Price Earning (P/E) 24.59 48.79
EPS 6

Return of the company (184%) is more than the index return (19%), so 10% explained by
market. The excess return 90% is explained by other factors due to the good performance
of the company even though P/E Ratio of the company is less than the P/E Ratio of the
Industry.

COMPANY DATE CLOSING PRICE RETURN INDUSTRY

31/03/2005 372.35
Automotive Axles 93%
1/4/2004 193
SENSEX BETA 0.1774
BSE INDEX RETURN 2.561656
NIFTY BETA 0.14449
NSE INDEX RETURN 1.6414064
VALUATION RATIOS Price Earning (P/E) 22.55 15.87
EPS 13.30

Return of the company (93%) is more than the index return (3%), so 3% explained by
market factor. The excess return 97% is explained by other factors due to the good
performance of the company. P/E Ratio of the company is more than the P/E Ratio of the
Industry.

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Conclusion of fundamental study

The research shows that Indian stock market is inefficient so fundamental analysis can be
used to predict future prices of stocks because out of 50 stocks 37 stocks are influenced
by other factors and 13 stocks are influenced by market factor or not explained properly
by other factors due to various reasons. This shows that there is a low correlation
between index and price of individual stock. In inefficient market individual stocks are
influenced by other factors rather than market related factor. In this case hold strategy is
better because past data can be used to predict future. Remaining 13 stocks have to be
removed from portfolio. If market is efficient market factor influences up to 90%-95%,
so in this case past data can’t be used to predict future stock prices. Finally Indian stock
market is inefficient so fundamental analysis can be used to predict future stock prices
and by this you can beat the stock market.

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 5. 1 SUMMARY OF FINDINGS

 The research shows that Indian stock market is not that efficient. This has been
found out by conducting auto correlation test and run test.

 This means that share prices are not adjusted to the new information as soon as
they are available and speculators can make money out of this. And research shows
that low correlation between index and price of individual stock.

 Individual investor can beat the market by using technical and fundamental
analysis.

 Past data can be used to predict the future stock prices in Indian stock markets.
Because Indian stock market are influenced by other factor rather than market factors
i.e. Indian market is inefficient

 The activity of Financial Institutional Investor is one of the reasons for volatility
of the Indian stock market.

 Mid Cap stocks are providing more returns than blue chip and index stocks. It is
profitable to invest in Mid Cap companies rather than S&P CNX NIFTY and BSE
Sensex Companies.

 Indian stock market is very speculative.

 Individual Investor can increase his return by seeking the advice of the
professional and experts in the field of stock market.

 Rumors plays major role in stock market.

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 5.2 RECOMMENDATION

 Taking experts or professional help would increase returns on investments

instead of Investing own.
 Investing in mid cap companies is better because it is providing more returns
compared to sensex and nifty companies.
 Government should reforms policy to strengthen efficiency of market.
 Investor should be well alert to the new information and rumors and act
accordingly.

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 5.3 CONCLUSION

Individual investors put money in the stock market; Individuals invest in the stocks with
the objective of generating return on the capital invested. Many investors try not only to
make a profitable return but also to outperform, or beat, the market by conducting
research. It is clear that Indian stock market is inefficient. Past data can be used to predict
future stock prices, so skillful individual investor can beat market with proper study of
fundamental analysis of the company. The individuals can make better investment
decision by studying the Price Earning Ratio and Earning Per Share of the companies.
Mid Cap companies are providing better returns than Index returns. With the help of
experts you get an idea of investing in a particular stock, how much to invest, and when
to invest. There are different types of investors like risk taking, risk averse. Risk taking
investor invests in directly in the equity market where as risk averse investor invests
through mutual fund and brokers. Now-a-days Rumors are playing major role compared
to fundamental and technical analysis. Some investors who invest on the bases of rumors
are earning more returns compared to investors who use fundamental and technical
analysis for taking investment decision. Indian stock market is highly fluctuating because
of activities of foreign financial institutional investors who are investing in Indian stock
markets due to promising return on investment. As Indian economy is growing in a rapid
pace, more and more foreign investment is happening in the Indian capital market.

From the study it can be concluded that still Indian Stock market is not efficient as
compared to developed nations’ stock market. Even though Indian stock market is
inefficient, they are catching up very rapidly with other stock market particularly
emerging countries. Reforms have to be undertaken in the capital market in order to
strengthen the stock market. The government should undertake policy measures to
strengthen the stock market. The regulatory authority for the stock market, SEBI should
be strengthened.

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 BIBLIOGRAPHY

Newspapers:
 Business Line
 Economic times

Websites
 nseindia.com
 bseindia.com
 About.com

Database
 Capitaline

Books referred
 Investment analysis and portfolio management-Reilly and brown
 Financial management-Prasanna Chandra

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