Investment Decision Using Capital Asset Pricing Model

Abstract

In January 2020, Mr. Durai being an amateur investor wanted to diversify his portfolio by adding some fast-moving consumer goods (FMCG) stocks. He has chosen three FMCG stocks, namely Hindustan Unilever, Godrej Consumer Products and Dabur India, based on high trading volume. The capital asset pricing model (CAPM) is one of the widely followed techniques to measure risk and return of equity investment. The risk and return are the key factors that help investors to take an informed decision. To assess the risk and return profile of stocks, Mr. Durai considered monthly stock prices from 2015 to 2019. Beta is a measure of risk that shows the volatility of the stock return with respect to that of market. The beta of a 5-year stock price is more robust than beta of 1 year or 2 years due to heavy market fluctuations. The CAPM also helps investors to identify whether the stock is underpriced or overpriced. Therefore, the investors can avoid the overpriced stocks.