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Multifactors Model and Portfolio Management

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Risk-Return Relationship and Portfolio Management

Part of the book series: India Studies in Business and Economics ((ISBE))

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Abstract

Emerging stock market returns have been extensively studied by academic community over the past two decades. However, there is still no consensus among the researchers and practitioners as to which asset pricing models should be used to explain returns in these markets. The basic objective of the study is to evaluate the power and performance of multifactor asset pricing models (three and four factor model ) over the traditional one factor CAPM , using the data from one of the fastest growing emerging market: India. The study using a large sample data of 470 listed stocks over a period of 16 years stretching from January 1997 to March 2013, evaluate the relevance of Fama and French three factor model as well as liquidity augmented four factor model in explaining the stock return variations in the Indian stock market . The study employs time series regression approach to examine the impact of market risk , size risk , value risk and liquidity risk on stock returns. The overall results of the study provide support to the multi-dimensional nature of risk and suggest the use of multifactor asset pricing models for consideration in investment decisions. Both Fama and French three factor model and liquidity augmented four factor model were found to be superior than traditional one factor CAPM . Though, liquidity augmented four factor model was found to be slightly better in explaining Indian stock returns as compared to Fama and French three factor model .

The moral justification of capitalism lies in the fact that it is the only system consonant with man’s rational nature, that it protects man’s survival qua man, and that its ruling principle is: justice.

Ayn Rand, Capitalism: The Unknown Ideal

This chapter draws from the author’s previous published work (Maheshwari & Dhankar, 2016) co-authored with Supriya Maheshwari, Faculty of Management Studies, University of Delhi, Delhi, India., and originally published in IIMS Journal of Management Science, Vol. 7 No. 3. Copyright © 2016 Indian Institute of Management Shillong. All rights reserved. Reproduced with the permission of the copyright holders and the publishers.

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Authors and Affiliations

  1. Faculty of Management Studies (FMS), University of Delhi, New Delhi, Delhi, India

    Raj S. Dhankar

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  1. Raj S. Dhankar
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Correspondence to Raj S. Dhankar .

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Dhankar, R.S. (2019). Multifactors Model and Portfolio Management. In: Risk-Return Relationship and Portfolio Management. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3950-5_7

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