A study on the quarterly sector-wise returns from the Indian Capital Markets over the last 10 years and its implication on sector selection and portfolio diversification
EGMP24109
EGMP
Batch 24

EGMP – 24 | EGMP24109

Objective:
The study attempts to analyze sector-wise returns over the last ten years (2001-2011) from various sectors that form a part of the Indian Capital Markets. It attempts to calculate summary estimates of rates of return from each sector and identify implicit relationships that exist among sectors to aid portfolio selection and diversification decisions.

Summarized Quarterly Returns:

Month | Quarter | Auto | Banks | IT | Oil | Metals | Health Care | FMCG | Power | Capital Goods | Sensex | BSE 100 | June-01 | 2001-02: Q1 | -7.29% | -10.3% | -7.32% | 3.28% | 1.64% | -5.31% | -5.78% | 12.62% | 5.22% | -4.10% | -3.65% | Sept-01 | 2001-02: Q2 | -3.15% | -8.36% | -35.7% | -20.0% | -29.0% | 0.97% | -7.53% | -20.35% | -15.6% | -18.6% | -19.4% | Dec-01 | 2001-02: Q3 | 38.98% | -0.82% | 69.11% | 1.87% | 20.59% | 8.50% | 8.69% | 11.15% | 12.89% | 16.03% | 18.65% | Mar-02 | 2001-02: Q4 | 25.78% | 1.40% | 2.10% | 54.01% | 32.52% | 11.04% | 1.37% | 14.83% | 23.97% | 6.35% | 10.21% | June-02 | 2002-03Q1 | 12.16% | 3.87% | -10.5% | 2.75% | 37.45% | -3.74% | -8.62% | 7.57% | 24.37% | -6.48% | -3.84% | Sept-02 | 2002-03Q2 | -18.4% | -1.38% | -8.59% | -5.57% | -26.3% | -5.16% | -6.96% | -10.54% | -12.9% | -7.81% | -10.69% | Dec-02 | 2002-03Q3 | 16.79% | 11.23% | 24.62% | 15.19% | 20.93% | 1.46% | 2.51% | 6.37% | 10.29% | 12.90% | 12.94% | Mar-03 | 2002-03Q4 | -12.1% | 1.99% | -21.91% | -1.66% | -10.2% | -7.25% | -12.3% | 10.07% | 5.81% | -9.73% | -9.85% | June-03 | 2003-04Q1 | 36.40% | 26.45% | -12.9% | 35.74% | 56.94% | 28.31% | 23.58% | 29.27% | 38.83% | 18.32% | 21.23% | Sept-03 | 2003-04Q2 | 36.45% | 23.46% | 33.06% | 31.38% | 42.89% | 26.13% | 5.35% | 35.30% | 31.42% | 23.46% | 27.22% | Dec-03 | 2003-04Q3 | 52.57% | 30.93% | 36.57% | 29.62% | 55.03% | 30.43% | 18.58% | 49.42% | 38.72% | 31.12% | 32.85% | Mar-04 | 2003-04Q4 | -2.40% | 6.93% | -18.2% | 1.24% | -20.9% | -9.07% | -14.9% | 23.53% | -2.29% | -4.25% | -3.53% | June-04 | 2004-05Q1 | -10.8% | -18.7% | 9.03% | -24.0% | -18.5% | -5.94% | -12.6% | -24.58% | -12.4% | -14.2% | -13.6% | Sept-04 | 2004-05Q2 | 6.84% | 11.84% | 18.96% | 17.07% | 43.61% | 22.03% | 11.64% | 19.33% | 22.23% | 16.44% | 17.06% | Dec-04 | 2004-05Q3 | 20.45% | 36.88% | 19.33% | 10.56% | 23.72% | 17.50% | 15.03% | 12.83% | 22.91% | 18.25% | 19.43% | Mar-05 | 2004-05Q4 | -6.75% | 3.39% | 3.03% | -2.97% | 1.81% | -16.5% | -0.53% | 2.18% | 6.38% | -1.66% | -2.75% | June-05 | 2005-06Q1 | 9.82% | 4.33% | 7.26% | 12.29% | -15.5% | 9.15% | 21.75% | 7.89% | 14.15% | 10.80% | 9.14% | Sept-05 | 2005-06Q2 | 24.52% | 27.67% | 7.86% | 16.33% | 28.12% | 10.56% | 20.51% | 24.94% | 34.96% | 20.03% | 20.17% | Dec-05 | 2005-06Q3 | 17.68% | -0.84% | 19.76% | 10.57% | -5.22% | 1.17% | 6.60% | 8.96% | 18.17% | 8.84% | 8.47% |

Continued...

EGMP – 24 | EGMP24109

Month | Quarter | Auto | Banks | IT | Oil | Metals | Health Care | FMCG | Power | Capital Goods | Sensex | BSE 100 | Mar-06 | 2005-06:Q4 | 25.05% | 3.61% | 7.68% | 11.53% | 36.77% | 23.86% | 34.23% | 36.20% | 40.60% | 20.03% | 19.20% | June-06 | 2006-07:Q1 | -10.69% | -17.41% | -7.12% | 7.61% | -4.68% | -18.81% | -11.83% | -17.96% | -13.98% | -5.95% | -8.84% | Sept-06 | 2006-07:Q2 | 12.88% | 38.86% | 17.37% | 9.63% | 0.64% | 17.62% | 5.94% | 19.07% | 16.72% | 17.39% | 17.58% | Dec-06 | 2006-07:Q3 | 2.85% | 17.34% | 20.01% | 6.48% | 6.24% | 2.92% | -6.37% | 5.61% | 10.81% | 10.70% | 10.34% | Mar-07 | 2006-07:Q4 | -11.77% | -7.67% | -7.08% | 3.88% | -6.10% | -3.76% | -10.09% | -3.35% | -0.17% | -5.18% | -5.66% | June-07 | 2007-08:Q1 | -2.66% | 22.44% | -0.58% | 18.81% | 24.93% | 4.28% | 5.19% | 29.50% | 35.53% | 12.07% | 15.46% | Sept-07 | 2007-08:Q2 | 12.51% | 18.22% | -4.99% | 25.38% | 31.50% | -0.56% | 18.15% | 27.12% | 19.35% | 18.02% | 17.91% | Dec-07 | 2007-08:Q3 | 6.29% | 20.58% | -2.12% | 39.11% | 43.56% | 16.77% | 7.34% | 39.57% | 34.57% | 17.33% | 24.39% | Mar-08 | 2007-08:Q4 | -20.16% | -32.41% | -21.68% | -24.69% | -29.96% | -12.91% | -1.29% | -29.88% | -29.09% | -22.88% | -26.19% | June-08 | 2008-09:Q1 | -20.76% | -23.34% | 13.31% | -10.06% | -5.81% | 8.22% | -9.16% | -29.39% | -28.04% | -13.95% | -14.61% | Sept-08 | 2008-09:Q2 | 2.49% | 9.51% | -23.00% | 0.33% | -31.92% | -11.82% | 3.87% | 0.35% | 4.96% | -4.47% | -4.81% | Dec-08 | 2008-09:Q3 | -33.48% | -15.81% | -28.02% | -33.07% | -42.01% | -19.23% | -8.02% | -19.07% | -34.68% | -24.98% | -25.46% | Mar-09 | 2008-09:Q4 | 25.24% | -17.67% | 2.59% | 16.58% | 11.14% | -4.59% | 2.46% | 0.97% | -6.44% | 0.63% | -0.91% | June-09 | 2009-10:Q1 | 48.89% | 82.84% | 43.82% | 33.14% | 86.90% | 25.50% | 11.12% | 53.88% | 97.92% | 49.29% | 53.19% | Sept-09 | 2009-10:Q2 | 46.20% | 20.02% | 39.05% | 11.56% | 30.89% | 24.00% | 13.84% | 8.22% | 7.50% | 18.17% | 17.95% | Dec-09 | 2009-10:Q3 | 11.58% | 1.78% | 13.46% | -0.05% | 22.73% | 13.94% | 8.38% | 3.66% | 2.61% | 1.97% | 3.35% | Mar-10 | 2009-10:Q4 | 3.17% | 6.20% | 0.99% | -2.98% | 3.30% | 6.18% | 1.42% | -3.22% | -0.25% | 0.36% | 0.76% | June-10 | 2010-11:Q1 | 8.50% | 1.06% | 1.56% | 7.04% | -18.19% | 7.89% | 14.10% | 2.09% | 4.46% | 0.99% | 1.53% | Sept-10 | 2010-11:Q2 | 14.47% | 30.28% | 11.80% | -3.93% | 14.69% | 4.30% | 15.15% | 2.70% | 8.74% | 13.38% | 12.55% | Dec-10 | 2010-11:Q3 | 7.43% | -4.60% | 14.76% | 1.48% | 4.33% | 12.32% | -0.95% | -7.62% | -3.63% | 2.19% | 0.45% | Mar-11 | 2010-11:Q4 | -9.23% | -0.60% | -4.05% | -3.40% | -8.15% | -10.55% | -2.39% | -9.25% | -14.15% | -5.19% | -5.43% |

The data has been analyzed for summary statistics and the results obtained were as follows:

Summary Descriptive Statistics | Auto | Banks | IT | Oil | Metals | HealthCare | FMCG | Power | Capital Goods | Sensex | BSE 100 | Mean Return | 8.90% | 7.58% | 5.58% | 7.55% | 10.25% | 4.99% | 3.93% | 8.25% | 10.51% | 5.39% | 5.82% | Median Return | 7.96% | 3.74% | 2.81% | 6.76% | 5.29% | 4.29% | 3.19% | 7.73% | 8.12% | 4.27% | 5.91% | Standard Deviation | 20.2% | 20.8% | 21.0% | 17.72% | 28.49% | 13.62% | 11.69% | 20.25% | 23.96% | 15.30% | 16.46% | Sample Variance | 4.10% | 4.33% | 4.43% | 3.14% | 8.12% | 1.86% | 1.37% | 4.10% | 5.74% | 2.34% | 2.71% | Range | 86.0% | 115.2% | 104.8% | 87.08% | 128.9% | 49.6% | 49.16% | 83.76% | 132.6% | 74.2% | 79.38% | Additional Statistics | Minimum Return | -33.4% | -32.4% | -35.7% | -33.0% | -42.0% | -19.2% | -14.9% | -29.8% | -34.6% | -24.9% | -26.1% | Maximum Return | 52.5% | 82.8% | 69.1% | 54.01% | 86.90% | 30.43% | 34.23% | 53.88% | 97.92% | 49.29% | 53.19% | Standard Error | 3.20% | 3.29% | 3.33% | 2.80% | 4.50% | 2.15% | 1.85% | 3.20% | 3.79% | 2.42% | 2.60% | Kurtosis | -28.8% | 317.1% | 104.8% | 69.17% | -8.91% | -85.0% | -34.2% | -16.8% | 334.4% | 47.91% | 49.47% | Skewness | 28.5% | 108.0% | 61.6% | 17.85% | 36.70% | 11.11% | 40.33% | 15.42% | 99.2% | 26.96% | 29.87% |

Observations: a. The Capital Markets and Metals sectors indicate the highest rate of mean quarterly returns. However the Standard deviation for both these sectors are among the highest of all sectors at 24% and 28% respectively, thereby indicating a higher degree of variability of returns.

b. FMCG and Healthcare sectors have the lowest levels of Standard Deviation and represent sectors with the lowest degree of volatility for investors seeking to look at a steady rate of return.

c. The data seems to represent the traditional notion of higher the risk (variation in returns) the higher the rate of return. EGMP – 24 | EGMP24109

EGMP – 24 | EGMP24109

Correlation between Sectors Correlation | Sector Vs. Indices | Sensex | BSE100 | Auto | Banks | IT | Oil | Metals | Healthcare | FMCG | Power | Capital Goods | Auto | 84.75% | 84.76% | - | 65.04% | 68.92% | 69.89% | 78.20% | 77.15% | 68.15% | 71.41% | 74.18% | Banks | 85.85% | 86.40% | 65.40% | - | 44.92% | 58.46% | 69.48% | 62.44% | 51.78% | 78.07% | 84.53% | IT | 70.22% | 68.97% | 68.92% | 44.92% | - | 37.05% | 56.95% | 60.63% | 40.21% | 39.99% | 46.56% | Oil | 77.03% | 79.54% | 69.89% | 58.46% | 37.05% | - | 77.81% | 62.71% | 50.88% | 79.34% | 76.28% | Metals | 84.64% | 86.95% | 78.20% | 69.48% | 56.95% | 77.81% | - | 75.44% | 56.43% | 79.07% | 84.93% | Healthcare | 78.47% | 79.48% | 77.15% | 62.44% | 60.63% | 62.71% | 75.44% | - | 69.06% | 66.10% | 67.79% | FMCG | 71.96% | 69.51% | 68.15% | 51.78% | 40.21% | 50.88% | 56.43% | 69.06% | - | 59.72% | 59.94% | Power | 86.25% | 88.55% | 71.41% | 78.07% | 39.99% | 79.34% | 79.07% | 66.10% | 59.72% | - | 90.27% | Capital Goods | 89.10% | 91.00% | 74.18% | 84.53% | 46.56% | 76.28% | 84.93% | 67.79% | 59.94% | 90.27% | - | Sensex | - | 99.40% | - | - | - | - | - | - | - | - | - | BSE 100 | 99.40% | - | - | - | - | - | - | - | - | - | - |

Observations: a. Some of the sectors indicate a high degree of correlation with other sectors in the index. This is important for investors seeking to diversify their portfolio and invest into a broader range of companies.

For example: There is a highly significant correlation between the Power and Capital Goods sectors and any investor could be advised on caution when investing specifically into these sectors.

b. Incidentally the IT sector returns do not seem to indicate any correlation with other sectors as well as a moderate degree of correlation with the Sensex and BSE 100 returns. This

Red : High Correlation

EGMP – 24 | EGMP24109

Analysis of Variance between Capital Markets and Metal Sectors Regression Statistics | Multiple R | 0.84938 | | | | | | | | R Square | 0.72144 | | | | | | | | Adjusted R Square | 0.7141 | | | | | | | | Standard Error | 0.1523 | | | | | | | | Observations | 40 | | | | | | | | | | | | | | | | | ANOVA | | df | SS | MS | F | Significance F | | | | Regression | 1 | 2.283 | 2.28325 | 98.4159 | 4.26E-12 | | | | Residual | 38 | 0.882 | 0.02320 | | | | | | Total | 39 | 3.165 | | | | | | | | | | | | | | | | | Coefficients | Std Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | Intercept | -0.0036 | 0.0264 | -0.1355 | 0.8930 | -0.0569 | 0.0498 | -0.0569 | 0.0498 | X Variable 1 | 1.0097 | 0.1018 | 9.9205 | 4.26E-12 | 0.8036 | 1.2157 | 0.8036 | 1.2157 |

Analysis of Variance between Capital Markets and Metal Sectors Regression Statistics | Multiple R | 0.905 | | | | | | | | R Square | 0.819 | | | | | | | | Adjusted R Square | 0.814 | | | | | | | | Standard Error | 0.105 | | | | | | | | Observations | 39 | | | | | | | | | | | | | | | | | ANOVA | | df | SS | MS | F | Significance F | | | | Regression | 1 | 1.832 | 1.832 | 167.664 | 0.000 | | | | Residual | 37 | 0.404 | 0.011 | | | | | | Total | 38 | 2.237 | | | | | | | | | | | | | | | | | Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | Intercept | 0.019 | 0.018 | 1.069 | 0.292 | -0.017 | 0.056 | -0.017 | 0.056 | 0.126240589 | 1.071 | 0.083 | 12.949 | 0.000 | 0.903 | 1.238 | 0.903 | 1.238 |

EGMP – 24 | EGMP24109

Analysis of Variance between Capital Markets and Metal Sectors

Regression Statistics | Multiple R | 0.9909 | | | | | | | | R Square | 0.9819 | | | | | | | | Adjusted R Square | 0.9765 | | | | | | | | Standard Error | 0.0235 | | | | | | | | Observations | 40 | | | | | | | | | | | | | | | | | ANOVA | | df | SS | MS | F | Significance F | | | | Regression | 9 | 0.8965 | 0.0996 | 180.7538 | 0.0000 | | | | Residual | 30 | 0.0165 | 0.0006 | | | | | | Total | 39 | 0.9130 | | | | | | | | | | | | | | | | | Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | Intercept | -0.0130 | 0.0042 | -3.1292 | 0.0039 | -0.0215 | -0.0045 | -0.0215 | -0.0045 | Auto | -0.0232 | 0.0411 | -0.5653 | 0.5761 | -0.1071 | 0.0607 | -0.1071 | 0.0607 | Banks | 0.2519 | 0.0358 | 7.0411 | 0.0000 | 0.1789 | 0.3250 | 0.1789 | 0.3250 | IT | 0.2392 | 0.0270 | 8.8733 | 0.0000 | 0.1842 | 0.2943 | 0.1842 | 0.2943 | Oil | 0.1700 | 0.0404 | 4.2076 | 0.0002 | 0.0875 | 0.2524 | 0.0875 | 0.2524 | Metals | 0.0220 | 0.0314 | 0.7017 | 0.4883 | -0.0421 | 0.0861 | -0.0421 | 0.0861 | Health Care | -0.0490 | 0.0523 | -0.9376 | 0.3560 | -0.1558 | 0.0578 | -0.1558 | 0.0578 | FMCG | 0.2856 | 0.0493 | 5.7919 | 0.0000 | 0.1849 | 0.3863 | 0.1849 | 0.3863 | Power | 0.1164 | 0.0479 | 2.4280 | 0.0214 | 0.0185 | 0.2143 | 0.0185 | 0.2143 | Capital Goods | 0.0292 | 0.0500 | 0.5854 | 0.5627 | -0.0728 | 0.1313 | -0.0728 | 0.1313 |

Inferences a. Mean rate of return for the Sensex per quarter is 5.39% while a portfolio with specific sector selection can earn investors a higher average rate of return than the benchmark indices.

b. In selecting sectors, investors need to pay attention to cross-sector relationships to avoid similar sectors that reduce the rate of return. EGMP – 24 | EGMP24109