Understanding the complex relationship between stock and market returns is vital in the dynamic realm of finance. Returns serve as barometers for investment profitability, facilitating performance evaluation and risk assessment for investors pursuing their financial objectives. Stock return measures the price percentage change of an individual stock, reflecting its performance and profitability. Conversely, market return signifies the collective performance of a broad stock market index. Analyzing both is critical since it enables investors to compare individual investment performance with broader market trends, aiding informed decision-making and risk management. There may still be aspects of market return and stock return relationship that are not fully understood or explored in existing research. This article underscores the significance of each in shaping investment strategies. It empowers investors with valuable insights into portfolio management, risk evaluation, and optimizing returns in volatile markets.
Relationship between stock and market return
The relationship between market return and stock return is essential because it helps investors assess a stock’s sensitivity to broader market movements. A positive correlation suggests the stock tends to move in sync with the market, while a negative correlation implies an inverse relationship. By examining this linkage, investors can gauge how a stock might perform under different market conditions, aiding portfolio diversification, risk management, and investment decision-making. Hence, studying the relationship between market and stock returns is critical for optimizing investment strategies and managing risk effectively (Merkoulova & Veld, 2022).
To fulfil the study objective, daily data for the year 2017-2018 is collected for the analysis. The data combines different companies’ open and close prices of stocks and their market open and close values. The tool that will be used is STATA. Two methods are used for analysis, i.e., regression and trend. Regression analysis helps to understand the magnitude of impact while trend analysis helps to assess the linkage between the two over the selected period
The most suitable method is regression analysis as regression models help quantify how changes in market returns affect individual stock returns. It can identify factors that explain variations in stock returns, including market movements.
Analysing the stock returns of the Energy sector
The energy sector encompasses the production, distribution, and consumption of various forms of energy, including fossil fuels, renewable sources, and electricity. It plays a vital role in powering modern economies and societies.
The slope value of 0.006 implies that a 1% market return increase corresponds to a 0.006 stock return increase, indicating a positive relationship between market and stock performance. Conversely, the intercept value of -0.350 signifies the expected stock return when the market is unchanged, suggesting potential negative returns due to specific stock factors or unaccounted external market conditions.
The daily stock return for NTPC, SE Power, Adani Power, Adani Transmission, BHEL, Gujarat Industries Power, GVK Power, Jaiprakash Power, JSW Energy, KEC International, Rattan Power, Reliance Power, Tata Power, and Torrent Power consistently remains at zero with no fluctuations. Market returns exhibit continuous fluctuations, typically ranging between -500 to 500. In quarters one and three, market returns stay within the -500 to 500 range, while in quarters two and four, they dip below -500. Additionally, in the last quarter, market returns surpass 500. Notably, there is no discernible correlation between the movements of market returns and stock returns for these companies, indicating a lack of association.
The daily stock return data consistently hovers near zero, displaying minor fluctuations. This pattern signifies a lack of linkage with the market return.
Indian Energy Exchange
There is a slight variation in stock return alongside market return, suggesting the possibility of a link between the two.
The daily data for stock return goes a little ahead of zero, trying to meet market returns representing the possibility of linkage between variables.
The daily data for stock return stays near zero, with minor fluctuations.
There is slight variation in stock return along with market return representing the possibility of a linkage between the two.
The stock return for the company is moving in tandem with the market return, indicating the presence of a linkage between the two.
In conclusion, for all the companies in the energy sector, the stock return generally fails to align closely with the movements in market return. The highest peaks and lowest troughs are predominantly observed in the last quarter, while the second quarter tends to exhibit lower highs and lows.
Analysing the stock returns of the Pharma sector
The pharmaceutical sector is dedicated to the comprehensive process of researching, developing, manufacturing, and distributing drugs and medications. These products play a crucial role in enhancing public health and addressing a wide range of medical conditions. Due to the larger number of selected companies, they were divided into two groups for closer examination and analysis.
The analysis for the 1st group of the pharma sector is presented below.
The slope value of 0.01 implies that a 1% market return increase corresponds to a 0.01 stock return increase, indicating a positive relationship between market and stock performance. Conversely, the intercept value of -0.80 signifies the expected stock return when the market is unchanged, suggesting potential negative returns due to specific stock factors or unaccounted external market conditions.
The slope value of 0.0 indicates that a 1% increase in market return corresponds to no change in stock return. On the other hand, the intercept value of –1.92 implies the expected stock return when the market is unchanged. This suggests the possibility of negative returns attributed to specific stock factors or unaccounted external market conditions.
The daily stock return data consistently remains near zero with minimal fluctuations. In contrast, market returns exhibit continuous fluctuations, generally ranging between -500 to 500. In quarters one and three, market returns stay within the -500 to 500 range, while in quarters two and four, they dip below -500. Additionally, in the last quarter, market returns surpass 500. The absence of similarity in movement indicates no linkage between stock return and market return for the companies Gufic Biosciences, IOL Chemicals, Morphen Labs, Orchid Pharma, Alpha Labs, Ind-Swift Labs, Nectar Lifesciences, SeQuent Scientific, Bajaj Healthcare, Biofil Chemicals, Jagsonpal Pharma, Kilitch Drugs, Kopran, Lincoln Pharma, Mangalam Drugs, and Suven Life Sciences.
Hence, in all the companies of pharma, for most companies, the stock return moves along with the market return. Also, the majority of highs and lows can be seen in the last quarter. The second quarter has low highs and lows.
Concluding Fiscal Year 2017-18 Analysis
In the fiscal year 2017-18, the analysis highlights consistent underperformance of stock returns in the pharmaceutical and energy sectors relative to the market. Market returns displayed fluctuations, with a dip in the second quarter, followed by moderate performance in the first and third quarters, and a substantial surge in the final quarter.
For the energy sector, few companies exhibited a link with market returns, while in the pharmaceutical sector, most companies showed a tendency to move along with market returns, indicating a higher likelihood of a connection.
- Merkoulova, Y. and Veld, C. (2021) ‘Stock return ignorance’, Journal of Financial Economics, 19(40). doi: 10.1016/j.jfineco.2021.06.016.
- Paul, V. R. and Somanathan, K. (2018) ‘Trend and Regression Analysis of Stock Market Price of Select Industries in India’, Scholars Journal of Economics, Business and Management (SJEBM), 5(1), pp. 17–23. doi: 10.21276/sjebm.2018.5.1.3.