Role of CAPM to Analyse Risk & Return Relationship: Evidence of Indian Stock Market

Stock market is a place for investors to make investment in the security market. But, stock market is a risky place of investment. Due to the high fluctuations in the stock market investors as well as regulators tries to find out the risk and return of the security. The general thinking regarding risk and return is that the higher the risk higher the return. In other words risk bearer investors are always ready to take higher risk with risk premium. So, there is a requirement to analyze the risk and return relationship. In other words it is necessary to analyze to find out the impact of higher risk on the return of the securities. Capital Asset Pricing Model has been developed in the 1960's to evaluate the risk and return relationship of the securities.

The present research work emphases on the role of CAPM for the security market. The study is conducted on Indian Stock Market for the period April 2011 to March 2015. CAPM is analyzed with the help of various statistical tools like Average Return, Beta, and Covariance etc.

The CAPM has been broadly used for valuing cost of capital and evaluating the performance of managed funds. This analysis also helps the investors to take decision regarding investment in risky assets or not.