While estimating ‘betas’ (βs), it has been the convention to relate return on individual
securities to return on a market index such as BSE FMCG. In this paper, it is argued that
an alternative way of measuring stock market activity, say Divisia stock index, might
improve the performance of the model, for the following reasons.The market capitalization is calculated based on the total number of shares (promoters’
shares + long-term investors’ shares + volume of trade) multiplied by the price
prevailing on that day. The market index is constructed by adopting the same
methodology for all the scrips. In this paper, it is argued that market capitalization
should be calculated based on the volume of trade of a particular equity multiplied by
the price prevailing on that particular day. In such a situation, market capitalization
represents performance of that particular scrip more accurately.
The sector wise market index construction has been done based on market
capitalization which excludes promoters’ share but including the long-term investors’
shares and multiplying the volume of trade with the price on that particular day. Here
also it is argued that market capitalization should be calculated based on the volume
of trade of a particular equity multiplied by the price prevailing on that particular day.In a particular stock exchange, though a number of companies from different sectors
such as manufacturing, service, etc., are listed, only five to ten companies seem to
dominate the entire index.
Suppose the researcher would like to find the relationship between pharmaceutical
security returns and returns in the market index, the following problems arise:
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