EMPIRICAL ANALYSIS OF PORTFOLIO RETURN AND PRICE EARNING RATIO RELATIONSHIP

Abstract

Investors are widely interested in the future behavior of stock market. The efficient market hypothesis which stresses on the random walk behavior of the stock market is yet to be acclaimed in the age of information technology and globalization. This proposition is based on the fact that a group of researchers believe in efficient market hypothesis; on the other hand, others discard it. An efficient capital market is one which reflects the fully available information and makes it impossible to earn abnormal returns due to inefficiencies. The believers in efficient market hypothesis treat price-earning (P/E) ratio as reflector of the future investment performance of securities. A group of investors make their investment strategy after looking at the price-earning Ratios of stocks. Stocks with high P/E ratios are put into portfolio on the expectations that this performance will also persist in future.

The study aims to measure the performance of the portfolios, which are based on the P/E ratios. It is the ratio of current price of stock to latest twelve months earnings. It signifies the price paid by the buyer of a stock for each rupee of annual earnings. The study will be carried to know the relative performance of P/E portfolios under different conditions which would helps the investors.

The study involves the analysis of monthly data of price earning of the composite portfolio BSE 100 companies. The data covers the period January 2010 to December 2017. It has been

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collected from Prowess which is a data base maintained by Centre For Monitoring Indian Economy Pvt. Ltd. All the hundred stocks are going to be arranging in ascending order on the basis of median P/E ratio. Subsequently, ten portfolios comprising ten stocks have to construct. A portfolio, which occupies first rank, comprises ten stocks with least median P/E ratios. Portfolio placed on the second comprises next ten stocks with second least median P/E ratios and so on. Portfolio at the tenth place comprises ten stocks with highest median P/E ratios. To depict the characteristic of the P/Es of portfolio involve the estimation of beta and alpha analysis, and hypothesis test. To signify the variation in P/E ratio deviation and R square, correlation is estimated. A low correlation exhibits uniformity or small variation in the distribution of P/E ratio.

So to solve the problems of investors that they make correct portfolios this type of study is required. So they can make correct decision in forming their portfolio to minimize their risk.