International Research Journal of MMC (IRJMMC) Open Access

Volume 3(4), 2022 Special Issue: Conference Proceedings of NCQEJ-2022

ISSN 2717-4999 (Online) 2717-4980 (Print)

Analysis of Risk on Common Stock of Commercial Bank in Nepal

Narad Kumar Thapa1
1
Ph.D. Scholar, Faculty of Management, Dr. K.N. Modi University,
Newai, Jaipur, Rajasthan, India
*Corresponding Author: [email protected]
Citation: Thapa, N. K. (2022). Analysis of risk on common stock of commercial bank in Nepal. International
Research Journal of MMC, 3(4), 26–30. https://doi.org/10.3126/irjmmc.v3i4.48860

This work is licensed under a Creative Commons Attribution-NonCommercial

4.0 International License.

Abstract
The study was conducted to analyze the risk on common stock of commercial bank in Nepal
and to understand the risks and movements of the stock in relation to the market. The main
objective of any investor in the market is to maximize the profit and reduce the risk. The
paper helps the investor to know the snapshot of various statistical tools to be used to
analysis the risk and return of the stocks. The study is based on conceptual research so the
various research papers written from 2002 to 2021 have been reviewed. It is found that the
various tools are used to measure the risk like standard deviation, beta, and coefficient of
variation. The investor always needs to find a combination of higher return with low risk. The
beta is useful to judge Systematic Risk. Thus, this study helps the investor to arrive at a
conclusion and also to provide information about the performance of various banking
securities in the market in terms of return and risk.

Keywords: Bank, common stock, financial system, investors, risk, securities market,
systematic risk.

1. Introduction
Risk is the future uncertainty or deviation from expected earnings or expected
outcome. Risk measures the level of uncertainty that investor is willing to accept in exchange
for a potential return on their investment. Risk is the possibility that an outcome will not be as
expected, specifically in reference to returns on investment in finance. The field of risk and
return analysis has been greatly advanced by a number of researchers. This section discusses
the main points of a few academic papers that have been published in this area. Joghee (2021)
looked at the risk-return analyses of a few banking industry. For measuring risk and return,
the mean, standard deviation, covariance, variance, correlation, and beta were determined.
The study by Moolbharathi and Sugandi (2021) concentrated on gathering daily data
from the stock market, such as the closing price of stocks for the last five years, i.e., from
year 2017 to year 2021. For the most part, three broad types of sectors, such as the
Auto mobile, banking, and IT sectors, are used to compute the daily return of the stock and
measure the standard deviation. These sectors serve as direct indicators of the nation's
economic health. Zafar and Ahmed Siddiqui (2020) from Pakistan defined volatility as the
amount of uncertainty or risk surrounding the degree of fluctuations in the value of a stock. A
safety's value may be distributed over a greater range of values if the variation is
considerable. As a result, the security price may see a significant short-term change in either
direction. The stock market is volatile for a variety of reasons. Likewise, monetary policy,
inflation, interest rate, corporate income, financial stability, dividend policies, bond prices,
and many other macroeconomic, social, and political variables, According to Abhinandan and

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 International Research Journal of MMC (IRJMMC) Open Access

Volume 3(4), 2022 Special Issue: Conference Proceedings of NCQEJ-2022

ISSN 2717-4999 (Online) 2717-4980 (Print)

Nayak (2020), risk is the possibility that an investment's actual return will differ from what is
anticipated. This involves the potential loss of a portion or the entire initial investment.
Investors typically anticipate high rates of return with low levels of risk. However, in real
life, there is a trade-off between large potential profits and high degrees of uncertainty (high
risk). The study conducted by Srinivasa Rao et al. used different statistical techniques like
return, average return, standard deviation, variance and Beta. Coefficient of variation analysis
is to examine the relationship between two periods risk and return of banking stocks (Rao,
Venkateswararao.Podile, & Navvula, 2020).
In a similar vein, Kandel (2018) discovered that choosing an investment relied on two
variables: risk and return. They resemble the two halves of a coin. Risk is the possibility that
the actual return on an investment will be lower or higher than anticipated. Technically, the
standard deviation in statistics is used to measure it. Risk is a byproduct of uncertainty, and
the scale of that risk relies on how variable an uncertain cash flow is. Gautami (2018)
researched the changes in share prices of a few Indian corporations. The goal of the current
study is to look at the risk and return analysis of a few Indian stocks. Risk is the potential for
changes in real return. Gain in investment value is referred to as return. An investor can
assess the financial performance of an investment by looking at the return on their investment
portfolio. According to a study by Ravi and Patil (2018), stock market investments involve
future uncertainty, which is a risk that all investors must be willing to take in exchange for
the anticipated profits. Investments in the stock market therefore involve risk as well as
reward.
According to Yadav (2017), Risk and return are two key elements in equities
investing. The risk is typically low if the return on investment is small. On the other hand, a
bigger return is associated with more risk. The volatility of the market has an impact on stock
market performance as well. In contrast to developed nations, the Indian market has
progressed to become more informative and continues to offer better returns with less
volatility over long periods of time. A study by Sinha (2013) explained that Risk is a concept
that denotes a potential negative impact to an asset or some characteristic of value that may
arise from some present process or future event. It has gained a great deal of recognition for
its resilience, especially in the wake of the most recent global economic catastrophes, which
pushed its international competitors to the brink of collapse. Another researcher Sharma and
Boddla (2012) mentioned that there are many different sorts of hazards, but systematic and
unsystematic risks are the two main ones that affect investments.
This research deals with the analysis of risk involve in stock price of commercial
banks on the basis of financial statements and other economic situations in Nepalese context.
Risk is concerned with the possibility that the actual return will differ from the anticipated
return. Higher risk entails a wider gap between the realized and predicted returns. In this
sense, it is interesting to note that risk works both as ‘upside potential’ and ‘downside risk’.
Taking more risks increases the chance of great losses and possibilities of big wins at the
same time.

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 International Research Journal of MMC (IRJMMC) Open Access

Volume 3(4), 2022 Special Issue: Conference Proceedings of NCQEJ-2022

ISSN 2717-4999 (Online) 2717-4980 (Print)

1.1 Research Objective

This study has undertaken to focus on risk analysis of financial securities like common
stock of selected commercial banks of Nepal. The main objective of study is to analyze the
risk on common stock of commercial banks in Nepal and to measure the level of risk and
return involved in commercial banks.
2. Materials and Method Used
The study is based on the review of literature and the source of information is
secondary data. Descriptive study has been used for both qualitative and quantitative data for
collecting the information. This is a conceptual research therefore various related research
articles have been reviewed to get the findings and conclusions. It has used reliable sources
and data from scientific journals or research papers that are well reputed.
3. Result and Discussion
Moolbharathi and Sugandi (2021) found that the standard deviation measures the
stock's volatility; a higher SD indicates a higher risk, so investors are encouraged to select
stocks with a low standard deviation. The stock's volatility in relation to the market is shown
by the Beta (). The investor would have selected (= 1), suggesting that the stock's price
reflects market fluctuations. Investors should steer clear of stocks with high volatility because
a higher number (>1) denotes a stock's increased market volatility. HDFC Bank has the most
systematic risk during the research period of the 25 organizations that were chosen. As a
result, it suggests that HDFC Bank offers more risk and returns than any other stock in the
analysis.
The results of the risk and return analysis for 12 banks over a 10-year span between
two periods revealed that IndusInd Bank had greater returns (50.6%) with higher risk
(52.62%) during the UPA government's tenure (2010–2014), meaning the investors profited
by taking on high risk. Union Bank's lower returns (17.2%) and higher risk (63.32) indicate
that there was a greater risk involved for investors than there were rewards. The HDFC Bank
experienced better returns (23.39 percent) with minimal risk (18.32 percent) from 2015 to
2019 under the NDA administration, which is the ideal circumstance for any investor to hold
investments in this stock. Yes, the bank reported negative value returns (-4.41%) with higher
risk (54.76%), but not everyone expects this. (Rao,Venkateswararao. Podile, & Navvula,
2020).
The study conducted by Kandel (2018) found that both selected banks have a high
proportion of unsystematic risk i.e., NABIL (89.29%) and NIBL (93.18%) which can be
minimized from internal management. Hence, it is better to have a low proportion of
systematic risk and comparatively a high proportion of unsystematic risk because
unsystematic risk can be reduced to zero but systematic risk cannot be even reduced as it is
created from market.
Similar study conducted by Suresh and Sai prakash (2018) is based on the analysis of
stocks listed on Bank Nifty. The investor can use this information to decide if he needs to buy
stocks based on how the stock has performed over a specific time period. A stock with a
higher beta value should be avoided when building a portfolio since it is more susceptible to
market risk, which cannot be diversified like unsystematic risk.
Another researcher Dinakar & Prathibha (2016) found from their research that, Except
for Yes Bank and Kotak Mahindra Bank, all the stocks saw negative returns throughout the
study period. It was also discovered that Yes Bank provided the best return, while Punjab
National Bank provided the lowest return. Likewise, systemic risk was discovered to be
lowest for Yes Bank and highest for SBI. Due to their negative beta, the author came to the
conclusion that Bank of India and Syndicate Bank were less vulnerable to market risk than
Punjab National Bank and Bank of Baroda, which had the highest market risk. The betas of

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 International Research Journal of MMC (IRJMMC) Open Access

Volume 3(4), 2022 Special Issue: Conference Proceedings of NCQEJ-2022

ISSN 2717-4999 (Online) 2717-4980 (Print)

Punjab National Bank and Bank of Baroda were likewise discovered to be larger than one,
indicating that these companies were exposed to considerable market risk.
4. Conclusions and Recommendation
After the analysis of risk and return of sample bank and based on difference research
papers it is concluded that all the commercial banks, which are under study, are very much
risky with fluctuated rate of return. From the findings of beta coefficient of each sample
bank, NABIL is seen very much volatile than NIBL stock. The study also shows that the
selected commercial banks under study, the required rate of return of both commercial banks
i.e. (NABIL & NIBL) is more than expected rate of return, so both stocks are overpriced.
Therefore, it is more profitable to take decision of short selling by investors.
There are two types of risk normally in common stock of commercial bank i.e.
systematic risk and unsystematic risk. Systematic risk is measured by beta β. The Beta (β)
indicates the volatility of the stock in comparison to the market. The Investor would choose
the (β = 1) indicating the fluctuation of market is reflected same on the stock. More the (β >1)
indicates the stock is more volatile in the market; hence the investor should be avoiding those
stocks with high volatile. The standard deviation is also a risk measurement tool which
measures the volatility of the stock, More the SD implies more the risk and investor is
advised to choose the stock based on minimum standard deviation.
In this study, it is also concluded that some of the banks have higher returns and some
banks have high risk. The investor always needs to find a combination of higher return with
low risk. The Beta is useful to judge systematic risk. Thus, this study helps the investor to
arrive at a conclusion and also provide information about the performance of various banking
securities in the market in terms of return and risk. In stock market, there are numbers of
investment approaches, among them banking is considered as one of the sensitive ways for
investment. Volatility in prices leads to higher risk for the investors. The present study
focused on the risk and return analysis of selected banks in Nepal and it is important for
investors to analyze the risk associated with stocks.

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Volume 3(4), 2022 Special Issue: Conference Proceedings of NCQEJ-2022

ISSN 2717-4999 (Online) 2717-4980 (Print)

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