Keyword: HPR, GM, AM
INTRODUCTION
It is helpful to begin the analysis with a number of definitions that make precise the subject matter that we will be studying. A standard definition is that investment is the sacrifice of current consumption in order to obtain increased consumption at a later date. From this perspective, an investment is undertaken with the expectation that it will lead, ultimately, to a preferred pattern of consumption for the investor. This definition makes consumption the major motivation for investment. In contrast, many investors would argue that their motivation for investment is to increase their wealth. This observation can be related back to the definition by noting that wealth permits consumption or, in more formal language, an increase in the stock of wealth permits an increase in the flow of consumption. Wealth and consumption are, therefore, two sides of the same coin. Looking more closely, two different forms of investment can be identified. Real investment is the purchase of physical capital such as land and machinery to employ in a production process and earn increased profit. In contrast, financial investment is the purchase of “paper” securities such as stocks and bonds.
Investment decisions are influenced by various motives. Some people invest in a business to acquire control & enjoy the prestige associated with in. some people invest inexpensive yachts & famous villas to display their wealth. Return is the primary objective of any investment. It acts as a driving force to investment. And also risk is positively correlated with expected return. The return for the investment mainly for the two types,
Capital appreciation
So simply return means sum total of the current yield (dividend/interest) and appreciation in the capital. An investor should realize that return of his securities. Here we are going to discuss about historical return of the securities (rate of return).
OBJECTIVES OF THE STUDY
Following are the important objectives of the study:To understand the concept of HPR- Holding Period Return
To understand the best return companies in BSE SENSEX
RESEARCH METHODOLOGY
This study is based on secondary data. Period of the study is from 2001 to 2012. Secondary data are collected from the deferent websites. The collected data has been tabulated, analyzed and interpreted for making conclusions. For the purpose of analysis and interpretation statistical tools are used.
ANALYSIS
Here researcher made emphasis on financial investment. So it is necessary to analyze deeply the risk return of a financial asset like shares. So an investment analysis is defined as in the following ways; “Investment analysis is the study of financial securities for the purpose of successful investing.”
From an investor’s perspective, the two most crucial characteristics of a security are the return it promises and the risk inherent in the return. An informal description of return is that it is the gain made from an investment and of risk that it is the variability in the return.
Example 1: At the start of 2005 an investor purchased securities worth 10000. These securities were worth 13000 at the end of the year. The return on this investment is Return=(13000-10000)/13000×100
Return = 23.08%.
Meaning of Holding Period Return
So an investor should understand the concept of Holding Period Return. It is the total return received from asset or portfolio of asset due to holding such asset or portfolio. HPR, it is calculated on the basis of, sum total of all incomes and growth (such as capital, appreciation) divided by the value at the beginning of the period i.e. initial investment.
To calculate annualized HPR, HPR= (income + (end value –initial investment) 1/year/ initial value There are deferent return calculations; arithmetic and geometric mean return are the two examples of them
Why geometric mean returns
The statistics familiar to most people is Arithmetic Mean. Arithmetic Mean is customarily designed by the symbol, (x bar) i.e. = ƹx/n
Or the sum of the values being considered divided by the total number of values. The Arithmetic Average return is the appropriate as a measure of central tendency of a number of returns calculated for a particular time, such as year. However, when percentages change in value over a period of time, then, the AM of these results will misleading. For example, investor purchased stock in year 2001, for RS 50 and it roses to 100 by year end. Here return is [(100-50)/50*100], 100%.
Then the next year same stock reached to RS 50 and the end of second year, here return is [(50-100)/100*100], 50%. Arithmetic means of return is 25% (i.e. (100+-50)/2. In real life investor bought stock for RS 50 and hold for two years and it was still at RS 50, actually no return at all.
A deferent average is needed to describe accurately the trace rate of return over multiple periods. The Geometric Average Return measures compound cumulative return over time. It is mainly used for an investment to reflect the realized changes in wealth over multiple periods.
The above example geometric return clearly tells that there is no return. I.e. zero return. Which means, GM= (1+100%)(1+-50%)1/2-1 → (1+1)(.50)1/2-1 → 1-1 = 0, Result is =0
Investment is the postponement of current consumption to the future to get a good return. Some times these return may mislead the investor. Here the researcher made the study to investigate the companies which are giving favorable return to the investor. The study is based on the holding period return, for that geometric mean and arithmetic mean average is used. Study reveals that there some companies which are providing a good return to the investor based on HPR.
By Jonathan D. Jones, (1999) “Total Return Analysis”
2. Sites referred: www.forexpro.com, www.wikipedia.org, www.bseindia.com, www.moneycontrol.com
* Share split is not considered here, study is based on the availability information in various websites.
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