Risk-Return Relationship and Effect of Diversification on Non-Market Risk : Application of Market Index Model in Indian Stock Market

The paper attempts to measure the relationship between risk and return, and the effect of diversification on non-market risk in Indian stock market by applying Market Index Model. For the analysis monthly adjusted opening and closing prices of composite portfolio of BSE 100 companies, for the period June 1996 through May 2005, have been taken. The study reports high positive correlation between portfolio return and risk. It also signifies that portfolio non-market risk declines with diversification. The results, so obtained are fully coinciding with the generalization of market index model, and thereby hold it applicable in Indian stock market, in establishing the trade off between risk and return