Relationship with Market/sector Returns with Individual Stocks in Colombo Stock Exchange

Executive Summery

The assignment mainly focuses on identifying the relationship between market return and sector return with individual company returns. For the analysis we selected Banking and finance sector which is one of the major sectors at Colombo Stock Exchange. We have analyzed the stock returns for the sector by selecting four leading banks and one insurance company who are listed in the Colombo stock exchange. Our focus was to calculate monthly returns of each company and to identify the risk return relationship of those returns with overall market performance. For this purpose we had gathered data for the last five years for the relevant companies as well as calculated market returns for the same period for analysis. To calculate the real returns, monthly dividends impact, bonus issue impact and rights issue impact have taken into consideration. At the final part of the report we focused on identifying how sector returns are sensitive to some of the macroeconomic factors such as interest rates and inflation of the country.

Our analysis shows that there is a strong positive relationship between the sector returns and market returns and individual risk profiles are varied much according to their company specific factors. However the strength of the relationship or how strongly each stock returns attached to the market return or the sector return varies significantly and it is unique to each stock.
 

1. Introduction

Colombo Stock Exchange consists of 253 companies and divides into 20 sectors.  The Market Capitalization as at 25th August 2006 is Rs.654 billion. Out of 20 sectors our focus is the Banking and Finance sector which is presumed to be one of the key sectors of the economy. This consists of 29 financial institutes. Our analysis is based on five major players in the sector consisting four leading banks and an insurance company.

• Commercial Bank           
• Hatton National Bank
• Sampath Bank
• NDB Bank
• Eagle Insurance

Our analysis focus on detailed risk and return analysis of the five players based on the adjusted market returns for the last five years with dividends, Bonus & Right issues. The overall sector performance will be evaluated against the market performance for the period from year 2000 to 2004 in terms of risk and return. Finally the performance of five individual firms are evaluated against the overall sector return and the overall market return

1.1 Colombo Stock Exchange

Market performance of Colombo Stock Exchange is assessed mainly on two indices andd twenty Sector Price Indices based on the business activities of companies. In addition the Colombo Stock Exchange publishes a series of Total Return Indices (TRI’s).