Introduction

CHAPTER – 1

INTRODUCTION

The financial system is the system that allows the transfer of money between savers

(and investors) and borrowers. A financial system can operate on a global, regional or firm

specific level. The financial system includes stock market. A stock market, or equity market,

is a private or public market for the trading of company stock and derivatives of company

stock at an agreed price; these are securities listed on a stock exchange as well as those only

traded privately. The word 'Blue chip stock' refers to the equity in the securities of high

quality companies. Blue chip stock is often also high in public share price. A blue chip stock

is the nickname for a stock that is thought to be a relatively safe investment.

Blue chip stock is a term named after the blue-coloured highest poker chip

denomination. Stock of "blue chips" or "blue chip stock” demonstrates some combination of

high credit rating, strong balance sheet, stable earnings power.

A blue chip stock usually has a diversified revenue base. Most Dow Jones Industrial

Average (DJIA) companies fall into the category of blue chip stock. Blue chip stock is not

limited to the thirty stocks in the Dow, blue chip can imply any publicly traded stock in a

leading international company listed in a foreign stock market. Blue chip stock is often found

in conservative investors and retirement portfolios. Volatility for blue chip stock is typically

lower than that of lesser known, more thinly traded stocks. Blue chip stock is often popular in

market downturns for their ability to pay dividends no matter what the economic climate.

1.1 IMPORTANCE OF THE STUDY

Efficient Market Hypothesis (EMH), an investment theory states it is impossible to

"beat the market" because stock market efficiency causes existing share prices to always

incorporate and reflect all relevant information. According to the EMH, stocks always trade

at their fair value on stock exchanges, making it impossible for investors to either purchase

undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to

outperform the overall market through expert stock selection or market timing, and that the

only way an investor can possibly obtain higher returns is by purchasing riskier investments.

According to the EMH, only change in fundamental factors, such as profits or dividends,

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Introduction

ought to affect share prices. But this theoretic academic viewpoint also predicts that little or

no trading should take place-contrary to fact, since prices are already at or near equilibrium,

having priced in all public knowledge. But the efficient market hypothesis is sorely tested by

such events as the stock market crash in 1987, when the Down Jones index plummeted

22.6%- the largest ever one day fall in the United States. This event demonstrated that share

price can fall dramatically even though, to this day, it is impossible to fix a definite cause: a

thorough search failed to detect any specific or unexpected development that might account

for the crash. It also seems to be the case more generally that many price movements are not

occasioned by new information: a study of the fifty largest one-day share price movements in

the United States in the post war period confirms this. Moreover, while the EMH predicts that

all price movements (in the absence of change in the fundamental information) is random

(i.e., non-trending). Many studies have shown a market tendency for the stock market to

trend over time periods of weaker or longer.

In finance, volatility is a measure for variation of price of a financial instrument over

time. The symbol σ is used for volatility, and corresponds to standard deviation. Volatility as

described here refers to the actual current volatility of a financial instrument for a specified

period (for example 30 days or 90 days). It is the volatility of a financial instrument based on

historical prices over the specified period with the last observation of the most recent price.

The study on volatility of Blue-chip shares will give an exposure to different share market

operations and also a detailed description regarding mutual fund. The study will provide

information’s regarding historical volatility occurred in the Blue-chip shares and trends

associated with it. Through this study, an investor also gets a detailed idea about the risk

associated with Blue-chip shares and the amount of return related with each share. This

phrase is used particularly when it is wish to distinguish between the actual current volatility

of an instrument and actual historical volatility. Actual current volatility refers to the

volatility of a financial instrument over a specified period but with the last observation on a

date in the past. Actual future volatility refers to the volatility of a financial instrument over a

specified period starting at the current time and ending at a future date (normally the expiry

date of an option). Historical volatility implied volatility refers to the implied volatility

observed from historical prices of the financial instrument (normally options).

From experience we know that investors may temporarily full financial prices away

from their long term trend level. Over reactions may occur – so that excessive optimism may

drive prices unduly high or excessive pessimism may drive prices unduly low. Now

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Introduction

theoretical and empirical arguments have been put forward against the notion that financial

markets are efficient.

1.2 NEED AND SIGNIFICANCE OF THE STUDY

Financial research can be a systematic and organized effort to investigate into a

problem encountered in the investment scenario. It comprises a series of theoretical concepts

designed and executed, with the goal of finding answers to the issues that are of concern to

the manager and the work environment. The first step in the process is to identify the problem

areas that exist in the selection of securities. Once the problem is clearly identified the next

step is to gather information analyze the data, and determine the factors that are associated

with the problem and solve it by taking necessary corrective actions. The entire process by

which we attempt to solve the problem is called research. Thus research involves a series of

well thought out and carefully executed actions that will enable the manager to know how

organizational problems can be solved. Research thus encompasses the process of enquiry,

investigation, examination and experimentation. These processes are to be carried out

critically, objectively, and logically.

Empirical evidences in research have shown that psychological factors may result in

exaggerated stock price movements. Psychological research has demonstrated that people are

pre -disposed to seeing patterns, and often perceives a pattern in what is, in fact, just noise. In

the present context, this implies that a succession of good news items about a company may

lead investors to overact positively. A period of good returns also boosts the investors self-

confidence, reducing his risk threshold.

Another phenomenon from psychology that works against an objective assessment is

group thinking. As social animals, it is not easy to stick to an opinion that differs markedly

from that of a majority of the group. An example with which one may be familiar is the

reluctance to enter a resturant that is empty: people generally prefer to have their opinion

validated by those of other in the group. The stock market, as with any other business, is quite

unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they

need. In the period running up to the 1987 crash, less than 1 per cent of the analyst's

recommendations had been to sell (and even during the 2000–2002 bear market, the average

did not rise above 5 %). In the run up to 2000, the media amplified the general euphoria, with

reports of rapidly rising share prices and the notion that large sums of money could be

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Introduction

quickly earned in the so-called new economy stock market and later amplified the gloom

which descended during the 2000–2002 bear market, so that by summer of 2002, predictions

of a DOW average below 5000 were quite common. In normal times the market behaves like

a game of roulette; the probabilities are known and largely independent of the investment

decision of the different players. In times of market stress, however, the game becomes more

like poker (herding behaviour takes over). The players must now give heavy weight to the

psychology of other investors and how they are likely to react psychologically.

In these circumstances, the investigator felt it inevitable to find out the reasons for the

price volatility of the stock market and reasons for inadequate yield or return in detail. The

literature and studies reviewed also do not include such an exhaustive study. The investors

are to be sensitised about the need for continuing stock trading as the state’s progress largely

depends on active trading and investment in growth firms. In this regard the following

research problems were highlighted.

1. How investors can evaluate the volatility in blue chip shares?

2. What is the current status of growth and decline in return of selected blue chip

shares?

3. Does there exists any association between stock prices and market index?

4. How can return of selected blue chip shares be compared simultaneously?

A detailed study on the problems and potentialities of stock market, price prediction

related techniques and fruitful suggestions for making this stock trading assumes great

importance for regaining the interest of investors in stock market. Hence, the investigator

selected the study.

1.3 STATEMENT OF THE PROBLEM

The vulnerable and unpredictable nature of the stock market, stock index and price

prediction related techniques needs urgent attention. A stock index or stock market index is a

measurement of the value of a section of the stock market. It is computed from the prices of

selected stocks (typically a weighted average). It is a tool used by investors and financial

managers to describe the market, and to compare the return on specific investments. Due to

high relative changes in the market on account of various intrinsic and extrinsic parameters,

make the prediction more complex and risky. The actual reasons behind this state of affairs

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Introduction

can only be aptly described by the facts and figures available. A worthwhile study can only

be undertaken through a detailed analysis is of utmost importance in formulating strategies to

overcome the crisis felt by investors. The present study is designed to meet this end making

with stock market as subjects of investigation. The study is entitled:

“PRICE VOLATILITY OF SELECTED BLUECHIP SHARES AND BEHAVIOUR OF

STOCK MARKET INDEX”.

1.4 OBJECTIVES OF THE STUDY

1) To evaluate the price volatility of selected blue chip shares.

2) To study the growth and decline of return of blue chip shares.

3) To evaluate association between stock prices and market index.

4) To examine the return of selected blue chip shares

1.5 HYPOTHESES OF THE STUDY

Keeping in view the above objectives of the study, it is proposed to formulate

certain hypotheses and test them by making use of the relevant data. The following are the

hypotheses formulated for the study:

1. The trend in price volatility of selected blue chip shares is encouraging.

2. There is no significant difference in the growth and decline of return of blue chip

shares.

3. There is no disparity between stock prices and market index.

4. The return of selected blue chip shares is the same.

1.6 METHODOLOGY OF THE STUDY

Method Adopted

The project is designed as analytical in nature to know and familiarize with blue chip

and other shares to Indian investors and its related implications in the share market. Research

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Introduction

methods and techniques that are found suitable are used for conducting this research. It

helped in arriving at solutions by analyzing and relating available data with unknown aspects

of the problem. The purpose of the present investigation is to study the price volatility of

selected blue-chip shares and behaviour of stock market index. The present study purely

relied on secondary data. The secondary data are collected mainly from the relevant

websites, Department of Economics and Statistics, published and unpublished reports,

documents, articles, working papers, published and unpublished research dissertations.

The sample stock selected for the present study are BHARATI AIRTEL LTD , BPCL,

ICICI, INFOSYS, IOC, MARUTHI, SBI, TATA MOTORS AND TCS. The data for the

study covers a period of 30/6/2009 to 31/3/2014. Since the above companies are market

leaders in their business and shares of such companies are well rated, hence considered to be

blue-chip companies. The data for the present study was taken from the official site of

Bombay Stock Exchange.

Period of Reference

A 4 year and 9 months period from 30/6/2009 to 31/3/2014 has been selected for the

present study. However, data pertaining to preceding years were also been incorporated in

the appropriate places wherever found necessary to make the study more precise and perfect

as possible.

1.7 Statistical Techniques Used

The following are the statistical techniques employed for the present study:

1. Trend analysis to examine the future trend in price of selected stock.

2. Carl Pearson’s correlation coefficient to find out whether there is any significant

relationship in the shares with index.

3. Single Classification Analysis of Variance (ANOVA) to find out whether there is any

significant difference among the price changes over the period.

The statistical analysis was done with the help of computer using appropriate

software.

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Introduction

1.8 SCOPE OF THE STUDY

The study on volatility of blue chip shares will give an exposure to different share

market operations and also a detailed description regarding blue chip shares. The study will

provide information’s regarding historical volatility occurred in the blue chip shares and

trends associated with each. Through this study an investor also gets a detailed idea about the

risk associated with blue chip shares and amount of return related with each share.

1.9 LIMITATIONS OF THE STUDY

Though all possible steps were taken to make the study a generalizable and reliable

one, a few limitations have crept into the study, which are listed below:

As the time allotted for the study was short ,it became difficult to gather all technical

information of production process

The study was mainly based on secondary data ,and so it is subject to the limitations

of the same

It is hoped that the findings of the study are valid and generalisable to a great extent, and

it is also hoped that the results of the study would be helpful to administrators / policy makers

as well as investors in developing constructive programmes which aim at regaining the past

glory of share market.

1.10 SCHEME OF REPORTING

CHAPTER -1

Chapter 1 includes an overall introduction about the study. It includes background of the

problem, introduction to company, objective of study , research methodology, period of study

, data collection method, research design, ,scope and limitation of the study.

CHAPTER – 2

Chapter 2 includes Literature review of the study. It aims to review the critical points of

current knowledge including substantive findings as well as theoretical and methodological

contributions to the particular topic.

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Introduction

CHAPTER – 3

Chapter 3 deals with the brief outlook of share market of India and the profile of companies

selected.

CHAPTER – 4

Chapter 4 covers data analysis and interpretation.

CHAPTER – 5

Chapter 5 deals with the findings, conclusions and the suggestions made through the study

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