Characteristic Regression Line of Components of S&P CNX Nifty and S&P BSE

Characteristic Regression Line (CRL) is a simple linear regression model estimated for a particular stock against the market index return to measure its diversifiable and non-diversifiable risks. It is a representation of the Capital Asset Pricing Model and is central to Modern Portfolio Theory. Securities and other assets regularly display abnormal positive and negative returns in real world markets. Stocks with returns above the characteristic lines propose abnormally high returns in relation to their risk and are undervalued and vice versa.The primary objective of this paper is to compute the characteristic regression line of all the component of both the indices, S&P CNX Nifty and S&P BSE Sensex. These indices were chosen as they are considered to be the benchmark index for Indian equity market. The data for this empirical study was extracted from readily available database of NSE and BSE stock exchanges of India. It was discovered during the study that both the indices have very high correlation coefficient of 98.40% between them. Further the study reveals the association pattern of all the 50 components with both the indices. This association pattern is irrespective of the composition structure of the indices. This fact actually has a great scope for future research purposes