Analysing annualized average returns from BSE listed stocks

By Riya Jain and Priya Chetty on May 13, 2021

The annualized average returns is the value of returns earned by investors annually by investing in a stock. A higher annualized average returns value than the market return indicates a secure investment for investors. Trend analysis of the stock movement shows that growth stocks provide the most returns to the investors. However, the existence of financial risks like crisis or market crash induces loss for investors. This risky environment of the BSE market directs investors towards more secure investment i.e. income stocks.

The previous article has explained the nature of annualized average returns and market return but this explanation is solely based on the dataset and not on the in-depth examination of return movement. Statistical analysis helps in removing the influence of biases and error by a detailed examination, making the predictions more reliable. This article focuses on statistically examining the stocks at five different time periods for BSE listed 303 companies i.e.

  1. April 1, 2000 – March 31, 2005
  2. April 1, 2005 – March 31, 2010
  3. April 1, 2010 – March 31, 2015
  4. April 1, 2015 – March 31, 2020
  5. April 1, 2000 – March 31, 2020.

This article presents the analysis for the periods 2000-2005 and 2006-2010. Paired t-test is applied at a 5% or 10% level of significance. The below-stated hypothesis is tested:

H0: There is no significant difference in the performance of growth, income, and value stocks.

HA: There is a significant difference in the performance of growth, income, and value stocks.

Comparison of annualized average returns with market return for the period April 1, 2000, to March 31, 2005

The performance of growth, income and value stocks herein is assessed by comparing the annual average return with the market value and examining the p-value.

 Growth stocksIncome stocksValue stocks
Pearson correlation0.9930.9350.971
t Stat2.3960.5902.197
P(T<=t) two-tail0.0750.5870.093
t Critical two-tail2.7762.7762.776
Table 1: Comparison of annualized average returns for the period April 1, 2000, to March 31, 2005

Analysis of the results derived for the Pearson Coefficient value and Paired t-test is shown below:

Pearson correlation findings

  • Growth stocks: Pearson coefficient value of the stock is 0.993 is greater than the required value for moderate linkage i.e. 0.5. This depicts that there is a strong positive correlation between the average return and market value of growth stocks.
  • Income stocks:  Pearson correlation value is 0.935 which is greater than 0.5, the stock shows that there is a strong linkage between market and annual average return but this relationship is less than that of growth stocks.
  • Value stocks: The Pearson coefficient is 0.971 is greater than the income stocks but less than growth stocks value.

The comparison of linkage between the average return and market return shows that growth stocks tend to have the strongest relationship while income stocks have the least linkage. Hence, there is more probability of higher profits for investors of growth stocks.

T-Test findings

In order to compare the performance, the t-test for the stocks was done. Analysis of the results is shown below.

  • Growth stocks: Having the t stat value as 2. 396 which is less than the critical value of t at 5% level of significance i.e. 2.776. The p-value of the growth stocks i.e. 0.075 is greater than 0.05 but less than 0.10. Thus, the null hypothesis of no significant difference is not rejected at a 5% level of significance but at the 10% level, there is a difference in the performance of stocks.
  • Income stocks: With the t stat absolute value of 0.590 which is less than the critical value i.e. 2.776. This result for income stocks could also be verified by the p-value. As the p-value is more than the significance level i.e. 0.587 > 0.01, 0.05 or 0.10, thus there is no significant difference in performance.
  • Value stocks: T stat value for value stocks is 2.197 which is less than the t critical value of 2.776. The p-value of 0.093 is though not less than 5% level but is less than the significance level of 0.10, thus there is the existence of a significant difference in stock performance.

Hence, examination of income, growth, and value stocks for the period April 1 2000 to April 1 2005 shows that with the presence of high variability and risk in the market, growth stocks tends to outperform other stocks.

Creating the opportunity for earning a higher return and having a strong linkage between the average and market return along with the highest t stat value, growth stocks performance is superior to other stocks. Other than growth stocks, value stocks also overcoming the undervaluation of stocks tends to create the possibility for earning income and provide a source of a higher return in comparison to income stocks.

Comparison of annualized average returns with market return for the period April 1, 2005, to March 31, 2010

For the period April 1 2005, to March 31 2010, the comparison of the performance for each of the stock is shown in below.

 Growth stocksIncome stocksValue stocks
Pearson correlation0.9570.9310.942
t Stat1.6060.1890.308
P(T<=t) two-tail0.1830.8600.773
t Critical two-tail2.7762.7762.776
Table 2: Comparison of annualized average returns for the period April 1, 2005, to March 31, 2010

Results of the analysis are explained in the below sub-sections.

Pearson correlation findings

  • Growth stocks: Pearson correlation value of growth stocks is 0.957 which is greater than the required value of 0.5. This indicates the presence of a strong positive correlation between the market return and the average return of the stocks.
  • Income stocks: With the Pearson correlation value of 0.931, there is a strong positive linkage between the annual average return and market return but still the strength of the bond is less than the growth stocks.
  • Value stocks: The value of correlation is 0.941 which is not only greater than the required value of 0.5 but also is more than the income stocks Pearson correlation. This depicts that the linkage between the average return fluctuation and the market return is stronger for the value stocks as compared to the income stocks. But as the value is less compared to the growth stocks; its performance is less than growth stocks.

Thus, it shows that even in the presence of a global financial crisis, growth stocks had the highest possibility of yielding benefit to an investor while income stocks have the least probability of higher returns.

T-Test findings

Assessment of the performance of stocks by comparing the average return and market return for each of the stock is shown below

  • Growth stocks: The value of t stat for growth stocks is 0.1606. Since the statistical value of the t-test is less than the critical value. Even the p-value test verifies the t stat results as the value is more than the significance level i.e. 0.183> 0.01, 0.05, or 0.10.
  • Income stocks:  Income stocks show a low t stat value of 0.189 which is less than the critical value of 2.776. The p-value of income stocks is also higher than the significance level of the study i.e. 0.860 > 0.01, 0.05, or 0.10, thus there is no significant difference in the performance of stocks.
  • Value stocks: With the t stat value of 0.308 less than the critical level i.e. 0.308 <2.776, there is no significant difference in the performance of stocks. The p-value of 0.773 further is greater than the significance level of 0.01, 0.05 or 0.10.

Though all the stocks show that there is not much difference in their performance, growth stocks had better performance in the financial market. Even with the presence of global recession, the stock constantly creates the possibility for investors to earn higher returns in comparison to income and value stocks. Furthermore, value stocks with the second-highest t stat and Pearson correlation value also benefit its investor with the possibility of earning a higher return. Hence, investment in growth and value stocks in comparison to income stocks tends to perform better.

Stock market performance during global financial crisis

With the availability of a variety of stocks, investors are interested in deriving more information about every stock in order to make an optimal investment decision. The statistical analysis of the growth, income, and value stocks performance for the period April 1, 2000 – March 31, 2005, and April 1, 2005 – March 31, 2010, shows that despite the existence of financial risks, growth stocks are the most effective source of investment. It gives investors an opportunity to earn more profits than average market returns.

Riya Jain
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