Risk & return relationship in the portfolio of banks' common stocks nyse versus ISE

Abstract

The main indicators of risk for a particular asset or a portfolio are the standard deviation which we define it as an indicator of total risk and the beta which we define it as an indicator of systematic (market) risk. In this paper the risk & return relationship of common stocks will be explained and analyzed for the purpose of constructing a portfolio in the context of Modern Portfolio Theory and Capital Asset Pricing Model. The main purposes of this research are (1) to measure the risk of common stocks and show their relations with the market portfolio's return based on theoretical framework of Modern Portfolio Theory and Capital Asset Pricing Model (2) to analyze a specific types of investment instruments (common stocks) from a specific sector (banking sector) for certain period of time (one year2006). The distinctiveness of the study as a part of general research is to calculate systematic risk indicator beta for nine biggest banks' common stocks and examine their risk & return relationship in context of Modern Portfolio Theory and Capital Asset Pricing Model based on daily return for 2006 in Turkey. Results indicated that (1) market risk indicator beta of Turkish Banks' common stocks is much higher than those of USA (2) there is not any negatively correlated common stocks in American Banks' common stocks on the contrary of one negatively correlated common stocks in Turkish Banks' common stocks (3) volatility of American Banks' common stocks are lower than those of Turkish and (4) risk & return relationships is not totally supported by CAPM. © EuroJournals Publishing Inc. 2007. © 2014 Elsevier B.V. All rights reserved.