An Empirical Evaluation of Risk Return Relationship in Indian Stock Market

Abstract

This article investigates the relationship between excess returns and different risk measures including beta which is a popular risk measurement variable in the Capital Asset Pricing Model (CAPM). Adopting an improved version of the Fama and MacBeth (1973) model, the present study made a new attempt to test, in relation to the Indian market, the validity and reliability of the model with residual, skewness, variance and standardised kutosis as independent variables. The return- risk relationship is analysed using the Newey and West ( I 987) process which addresses both multicollinearity and heteroskesticity issues in OLS. The study makes use of the weekly returns of 432 NSE listed Indian companies from January 1997 to December 2008. The results suggest that the beta alone does not measure the security returns. The other risk measures like residual, skewness, variance and kurtosis also have a significant role in explaining excess returns