Expected Rates of Equity Returns: Evidence from Indian Stock Market

This purpose of this paper is to present the expected equity returns for the Indian stock market for the benefit of investors, who may then compare such returns with actual market returns to evaluate whether the Indian stock market provides returns in excess of expectations. Both the capital asset pricing model (CAPM) which is based on systematic risk and the risk premium approach which is based on unsystematic risk, have been used to compute expected returns. The CAPM appears to be an appropriate model to calculate expected returns emanating from the Indian stock market. The average expected returns are 13.47 per cent and the average market index returns are 16.46 per cent, indicative of the market being able to perform better than the expected returns by the technical investors.The average cost of equity (ke) for the sample companies based on the risk premium approach is also around 14 per cent (13.75 per cent). The Indian equity market continues to be an attractive investment destination for both fundamental (long-term) and technical (short-term traders) investors. However, in the presence of volatility in the short-run which increases the risk, it would perhaps be prudent to invest in the long-run. As is evident from the literature reviewed, this is perhaps the first time expected Indian stock market returns are presented and computed through both the CAPM and the risk premium approach.