The present study examined the relationship between systematic risk and return with the applications of Capital Asset Pricing Model (CAPM) in the Indian stock market. The study is based on the secondary data and the data relevant for this study has been collected from the Centre for Monitoring of Indian Economy (CMIE) prowess database software. The present study used a sample of 225 securities to see the relationship between systematic risk and return. The present study is for eleven years starting from 1 January, 2001 to 31 December 2011, this period has been chosen because of transitional economy. The study used daily adjusted closing prices of listed 225 securities of BSE-500. The BSE Sensex Index has been taken as the market index and the term deposit rates with commercial banks were used as risk free rate. In the study for the purpose of checking the relationship between risk and return, the beta for each security was calculated by regressing individually the daily return of these securities on the corresponding returns of market index (first-pass regression) during the eleven years period. It is cleared from the first-pass regression results that out of 225 securities, 146 securities beta are positive and statistically significant at 1 percent level of significance and another 26 are positive and significant at 5 percent level of significance. It also found that 53 beta coefficients are positive but showing insignificant results. The overall results of the study showed 76.44 percent indication of positive risk-return relationship. On the second stage tried to investigate the linear relationship between risk and return by applying a cross sectional (second-pass) regression of individual securities returns of its beta estimates obtained as of the first-pass regression. It is observed from the second-pass regression results that there exists a positive relationship between the systematic risk and return of individual securities because the slope coefficient is positive and statistically significant at 5 percent level of significance that holds positive risk-return relationship. These findings make existing that the return of the securities depends upon the securities market. The results of the present study will be valuable for investors, financial analysts and policy makers.
Capital Asset Pricing Model (CAPM), Investment, Risk, Return, Securities
