NIFTY Exxpeccted

N d Reeturrns
fo
or D
Differentt Tim
me
Scaaless

6/2
20/2009

Everyybody talks s about higgh risk, low

w risk, or medium risk k. In absencce of a
quanntifiable nu
umber, it be ecomes very y subjective e to make a judgmentt call.
Therre is lack off guidelines
s which ind dividual inve estors like you or me can use
to make a judgm ment call. Just
J sayingg it is high risk, does not
n help us s. It is
very subjective.. Therefore e, if an indiv
vidual is innterested inn trading, th
he
empiirical numb bers I prese ented here can be used as a guid de to put ce
ertain
level of expectattions. It he
elps you un nderstand your
y risk-re
eturn scenaarios. It
helpss you quan ntify the “ris
sk”.
 NIFTY Expected Returns for Different Time Scales

NIFTY Expected Returns for Different Trading Time

Scales

In this paper, I am discussing the returns from short term perspective

for NIFTY index. Similar calculations can also be done using SENSEX,
but I believe NIFTY is a better representation. I calculated daily
returns, weekly returns, and monthly returns for NIFTY from August
2002 to May 2009. In all three cases I have used average closing value
on a given day, given week, and given month. The table below shows
the summary for these results.

Table 1: NIFTY Market Returns

You can see that how the likelihood of negative returns tends to
reduce when the duration of trade increases.

• For the time period used in this calculation, 47% of the time
daily returns are negative, 44% of the time daily returns are less
than 2%, and only 9% of the time daily returns are more than
2%.
• However, when we look on monthly basis, negative returns
reduce to 32% of the time, while 59% of the time monthly
returns are more than 2%.

In addition, more enterprising and inquisitive readers can look at the

graphical plots below in which I plotted:

• Histogram to show the distribution of the data; and

• Scatter diagram to show the randomness over a period of time

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 NIFTY Expected Returns for Different Time Scales

These plots also show a similar trend as summarized in table above.

• I am actually surprised that the histogram shows a very narrow

distribution for daily returns. I am also very confident that this
curve will pass statistical hypothesis testing to show it is
statistically a normal distribution. However, I want to keep it
simple here for ease of understanding.
• The histogram for weekly returns is skewing towards ‘less than
2% returns’.
• Monthly returns do not have any distribution. I do not know
whether lack of distribution is good or bad. However, you can
observe that the majority of the time there are positive returns
i.e. occurrence of 2% or more returns is quite often.

Figure 1: Market Returns - Different Trading Scales

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 NIFTY Expected Returns for Different Time Scales

Summary…

The purpose of my sharing these results is to bring out the expected

returns from the market based on daily, weekly, and/or monthly
trades. These are based on NIFTY index. These results can be
interpreted in multiple ways because each individual has its own way
at looking at number (glass can be half full or half empty).

Every individual is free to expect more than 2% returns on daily

trades. However, you must realize that there is only 9% chance that
you will get your more than 2% return. In addition, there is 47%
chance that you returns are likely to be negative. If you are willing to
take that risk, then go for it.

Another individual can target for more than 2% returns, but decides
to use monthly trading window. This way the chances of getting your
desired returns are increased to 59% (instead of only 9% chance using
daily trades).

Many readers and users alike may say that with proper stock picks
individual stocks can return 10%, 20% or even more. I agree with
them, and I do not deny the possibility of such high returns in short
time period. However, the point I am making here is what are the
“chances” of such high returns? Sure, individual stock picks can have
high returns, but chances become very low. For example, individuals
can surely attempt to target 5% or more returns on their daily or
weekly trades. But then, they should accept the fact that chances are
less than 1% and they are taking more risk than the market itself.

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