Abnormal Profit Opportunity in Indian Capital Market Revisited

This paper investigates residual risk and return and the potential for value maximization in the Indian capital market, considering 401 Indian stocks. The study uses the concept of information ratio, which measures residual return per unit of residual risk, and also the value maximization model, which optimizes residual risk-return, considering the different levels of risk-taking capability of the investor. The study finds that the residual return is high in the Indian capital market, but it is accompanied by a much higher residual risk and, therefore, the market provides little scope for earning abnormal return (i.e., return adjusted for market and residual risks). As such, value maximization opportunity is limited. The study further concludes that only those investors who have superior stock selection ability and are aggressive should opt for the active management strategy, while for others, the index fund (passive management) seems a better strategy.