Basic Research Journal of Business Management and Accounts ISSN 2315-6899 Vol. 1(5) pp. 78-83 December 2012Available online http//www.basicresearchjournals.orgCopyright 2012 Basic Research Journal

Review

Risk Analysis and its impact on return: A Study onManufacturing Companies in Sri Lanka

Puwanenthiren Premkanth

University of Jaffna, Jaffna, Sri Lanka

Email: Premkanth85@yahoo.com

Accepted 25 December, 2012

The necessity of well organized manufacturing sector is realized in every countrys economicaldevelopment. Sri Lanka's apparel manufacturing sector is highly developed and has evolved as anexport oriented industry for over two decades. Currently around more companies in Sri Lanka producea wide range of products including branded names -most of them catering to the international market.This study is aimed to analysis the Risk and Return of the portfolio management of the manufacturingsector. Portfolio management is the collection of different investments that make up on investors totalholding. Risk and Return of the portfolio management is very important aspect in the financialmanagement. Analysis of portfolio management of manufacturing sector is very useful for customersand investors. Data were obtained from the CSE handbook and web sites. The efficiency of the portfoliomanagement of manufacturing sector is analysis based on the portfolio management ratio analysis andcorrelation analysis. The detail of the analysis is explained in the study in detail. As a result of theanalysis it could be seen that positive strong correlation between the risk and return. It leads a highrisk on the investors fund to earn high return of manufacturing sector.

Keywords: Risk Management,Performance,Return

INTRODUCTION

Sri Lanka's apparel manufacturing sector is highlydeveloped and has evolved as an export orientedindustry for over two decades. Currently around morecompanies in Sri Lanka produce a wide range of productsincluding branded names -most of them catering to theinternational market. Today clothing labelled "Made in SriLanka" can be found in major department stores in theUSA, UK, Germany and Australia. This research is aimedto analysis the Risk and Return of manufacturing firms inSri Lanka. Portfolio management is the collection ofdifferent investments that makeup on investors totalholding. Risk and Return of the portfolio management isvery important aspect in the financial management.Portfolio management will involve the variousinvestments such as many different types of financialassets. Risk involved in such investment and derivedfrom them. Every manufacturing firm is dependent on itstotal advances portfolio has made manufacturevulnerable to risk in- non- performing advances, which isturn has led to liquidity and the long-term sustainability ofsuch profits depends to large extent on identifying andmanaging the multitude of risk facing the manufacturingcompanies. Currently investments of manufacturing

companies are considered as a very important aspect ofthe development of any country. It is an investment onlythe main profit of such books depend, in conformity tothis principal analysis on portfolio management ofmanufacturing companies is launched.

The government's industrial policy includesencouraging investment in industries in which it believesSri Lanka has a comparative advantage. The Board ofInvestment (BOI) offers various incentives for investmentin five industry segments: electronics and components forelectronic assembling, industrial and machine tools (anew emphasis), ceramics and glassware, rubber-basedindustries, and light and heavy engineering. Another keypolicy element is deregulation, and in 2001 a committedon deregulation was formed to study regulatoryimpediments to Sri Lanka's industrial development.

Statement of problem

Research problem focused here is risk of the manufacturing

sector affect the return and efficiency of portfoliomanagement of manufacturing firms return will varyaccording to the risk return of manufacturing firms willdetermine the efficiency of portfolio management. Thisresearch aimed in whether risk of the manufacturingsector affects the return and efficiency of portfoliomanagement.

Objective of research

The manufacturing system and Product play an importantrole in the daily life of the general public. Therefore it isimportant system in details. The followings are theobjectives of this study.

1. The compare the desired relationship betweeninvestment risk and return.

2. Portfolio management is an important feature in theactivities of manufacturing sector. The manage thevarious risk of the manufacturing companies.

Significance of the study

This survey will attempt to identify how the risk of themanufacturing sector investment attests on the returnand efficiency of the portfolio management of themanufacturing sector. Finding of this research may helpmanufacturing sector to make suitable, manage thevarious risk and lead of efficient portfolio management.This result also helps to companies or individuals identifythe best way of their investment to get maximum profit.

Literature Review

P. David, T. Yoshikawa, M.D.R Chari and A.A. Rashedargue the effect of foreign ownership on strategicinvestment in Japanese corporations by developing andtesting two competing perspectives, they found thatforeign ownership is move positively associated withstrategic investments for form with growth opportunitiesthan those lacking such opportunities. The relationship isrobust across both types of strategic investments studies.R and D capital intensity.

Porter(1992) explain the effect of combing banking andnon bank. Financial activities on banking organizationsrisk and return. In general, securities activities, insuranceagency, and insurance underwriting are all risker andmore profitable than banking activities. They also havethe potential to provide diversification benefits to bankingorganizations. While real estate operations are moreprofitable than banking. Real estate development maynot be real estate activities in general and theirdiversification benefits for banking organization are lessclear.

The Economist (2002) examines risk, return and the

Premkanth. 79

prospects for portfolio diversification among majorpainting and financial markets over the period 1976-2001.The art markets examined are contemporary masters,franch impressionists, Morden European, lath centuryEuropean, old master, surrealists,20th century Englishand modern us paintings. The financial markets compriseus treasury bills. Corporate and government bonds andsmall and large company stocks in common with theliterature in this area, the study finds that the returns onpaintings are much lowers and the risk much higher thanconventional investment markets, move over, while lowcorrelation of returns suggest that opportunities forportfolio diversification in art works also and inconjunction with equity markets exist, the construction ofMarkowitz mean-variance efficient portfolios indicatesthat no diversification gains are provide by art in financialassets portfolios. However diversification benefits inportfolios comprised solely of art works are possible, withcontemporary masters, 19th century European, oldmasters and 20th century English paintings dominatingthe efficient frontier during the period in question.

Zebras and Cabman (1984) presented a set ofsummary statistics of returns and risks for asset classesthat may be used as benchmarks for establishingallocation levels, a subsequent article comments on howcustomized benchmarks may provide a more appropriatebasis of comparison than generic indexes (McIntosh,1997).

Harein investigate the risk and return characteristics ofrisk arbitrage for a sample of 187 stock swap offers in theform of collars for the 1994-2003 periods. Using crosssectional analysis, they find that initial arbitrage spread issignificantly positively correlated with acquirers stockvolatility and the deal duration. using time series analysis,we identify a significant non-linear relationship in riskreturn profile for risk arbitrage portfolio: both strategy 1(long the target for the fixed value collar offers; long thetarget and short the acquirer for the fixed ratio collaroffers) and strategy 2.(delta hedging) produce returnsthat are strongly positively correlated with the marketreturn in a severely declining market and are notsignificantly correlated with the market return in a flat orrising market.

Sampling design

Table 1 below indicates clearly the sample of thisresearch. Manufacturing sector is producing products andservices, in Sri Lanka. There are 32 companies areavailable but researcher selected the 12 companies forthis study as sample.

Data Collection

Primary and secondary data will be used for the study.primary data collected form questionnaire and secondary

80. Basic Res. J. Bus. Manag. Acc.

Table 1. Sampling design

Country Type of sector No. of companiesavailable

No of companiesselected

Sri Lanka Manufacturing 32 12

Figure 1. The following figure illustrates the conceptual model

Table 2. Operationalization

Concept Variable Indicator MeasurementRisk Overall

RiskCAPM Equation

Risk = Risk free + Risk premiumRc =Rf + (Rm - Rf )

Market risk Dividend cover

Earning yield

Earning per shareDividend per share

Earning per shareMarket value

Return Earning Earning per shareratio

Price earning ratio

Profit after tax and preference share dividendNumber of equity shares(ordinary share)

Market price per shareEarning per share

Profit ROE

ROCE

P A IT and preference share dividend*100Equity share holders fund

Profit before interest and tax * 100Capital employed

data are collected from books, journal, magazines andannual report ect. Researchers are use to secondarydata method. Collected data from secondary sources willbe analysed. For this purpose, researchers use thefollowing analysis method.1. Ratio analysis2. Risk analysis (CAPM Model)3. Graphic analysis

Conceptual model

See figure 1 above

Operationalization

See table 2 above

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Table 3. Risk (X) Independent variable, Return (Y)Dependent variable

Year Return Risk2005 2.73 6986.722006 69.59 8795.742007 146.12 13256.372008 203.17 19721.372009 233.07 23226.22

Table 4. Correlations

**Correlation is significant at the 0.01 level

Table 5. Coeficiente, a dependent variable: ReturnCoefficientsa

-59.356 30.562 -1.942 .147.013 .002 .969 6.784 .007

(Constant)Risk

Model1

B Std. Error

UnstandardizedCoefficients

Beta

StandardizedCoefficients

t Sig.

Dependent Variable: Returna.

Hypotheses

The following hypotheses are formulated for the purposeof this study.H1:- Manufacturing companies portfolio management isefficiency.H2:- High degree of risk lead to high degree of return.

Correlation coefficient analysis

In this study, which is undertaken to find out therelationship between the risk and return of manufacturingfirms. Correlation analysis is carried out in order to findout the nature of relationship between the variable basedon the value of correlation coefficient, Here, Table 3 and4.

According to the coefficient correlation, there is positivemoderate relationship between risk and return during the2005-2009. So conclusion may be made, that there ispositive relationship between the risk and return.Through this finding, manufacturing firms can derive the

high return from high-risk involved investment.

Coefficient of determination (R2)

A more useful indicator will be the coefficient ofdetermination, which is defined at the squared value ofPearlmans moment correlation coefficient. Thecoefficient of determination of the Manufacturing firmsduring last 5 years as showing the following table 4.10.Table 5.

The coefficient of determination rp2 is 0.969. It meansthat 96.9% of variability of risk can be accounted. For byits liner strong relationship with return it follow that 4.1%of variability of risk is not explained by the return.

By using the correlation analyzes it can be found thathow the relationship is between the variables and but thenature of the relationship is between the variables. It isnot a proper way to describe the relationship exactlybetween the variables by using the correlation analyzes.Therefore regression analyses are the most suitable wayin order to find out the exact relationship between thevariables.

82. Basic Res. J. Bus. Manag. Acc.

Table 6. Coefficient Coefficientsa

-59.356 30.562 -1.942 .147.013 .002 .969 6.784 .007

(Constant)Risk

Model1

B Std. Error

UnstandardizedCoefficients

Beta

StandardizedCoefficients

t Sig.

Dependent Variable: Returna.

Table 7. Null Hypothesis of the Manufacturingfirms during the last 05 years (2005-2009) onthe basic of risk weighted

Multiple R 0.969R Square 0.939Adjusted R Square 0.918Value of F 46.021Significance F 0.007

Regression analysis

Regression analysis made to find out the equation, whichdescribes the relationship between the variable. Fromthis analysis the dependent variable can be forecastedthrough the independent variable, regression line was Y=a+bx. Here the regression summary output is obtainedthrough the statistical analysis. This output is given in thetable 6.

In this period, Coefficient of regression is 0.013, itindicates that for every year increase of the independentvariable return, will increase by 0.013(Rs 000) that is Rs13. On the basis of risk-weighted base, the coefficient ofregression is 0.013. It indicates that for every yearincrease of the dependent variable return will increase by0.013 that is Rs 1.3. Hence these analyses provide thehypothesis of high degree of risk lead to high degree ofreturn.This fitness is shown by the rp2 in the rp2 summaryoutput. This value rp2 is 96.9% (based on risk weight)therefore only 96.9% of can be explained through thisregression equation. That is the return affects the risk therisk only 96.9%. Rest of 4.1% denotes the other factors,which determines the return. However the rp2 subjectivetherefore f-test examine the fitness of regressionequation.

Null Hypothesis

Here null hypothesis means no relationship presumes torisk and return. Now researcher can take the nullhypothesis by the regression output. The following outputshow below. (On the basic of risk weighted) Table7.

Regression equation could be accepted at 5% ofsignificant level through the probability related to thevalue of F. The null hypothesis can be rejected becauseof the probability of significance level is less than 0.05 is

0.007. Here, Null hypothesis is rejected. And thealternative hypothesis is accepted. Therefore theregression formula is accepted. Thus regression formulahelps to explain the change of return by the effect of risk.

Finding of the research.

The following are identified based on the analysis of theRisk and return of the of the manufacturing firms.

When analysis of the relationship between the risk andreturn, Return was calculated through ratio analysis andRisk was estimated to use CAPM model. The correlationsbetween risk and return have a positive strong relation(0.9744). Therefore, when risk of investment increase,the return from the investment also increase. As a sameway when risk decreases, the income also decreases.Finally the relationship between manufacturing sector riskand return could be conformed by its regression analysis.During research since null hypothesis rejected otherhypothesis has been recognized and it is able to revealthe fact that there is direct liner relationship between riskand return.

Hypotheses Testing

It is proper to prove the hypotheses, which are putforward in this research compared to the findings of theresearch, got from the data. In this view.H1- Manufacturing firms, portfolio management isefficiencyThis is rejected on basis of findings got the ratio analysis.Because researcher can observe the trend of ROCE,ROE and (ROCE/ ROE) ratio for past 5 year of themanufacturing firms is not sufficient level. Henceportfolio management of the manufacturing firms is

inefficiency.H2- High degree of risk lead to high degree of return

This is accepted on the basis of finding got from thecorrelation analysis and regression analysis. According tothis analysis, this hypothesis is accepted. Hence thisresearch, the positive linear relationship between risk andreturn could be proved. Therefore when risk ofinvestment increases, the return from investment alsoincrease

CONCLUSION

A Risk and return of the portfolio management is thecollection of different investments that make up investorstotal holding. A portfolio management might be theinvestment in stocks and shares of investors orinvestment in capital projects of company finance is veryimportant to every organization to play their activitiessuccessfully. In Sri Lanka, Manufacturing companies areplay a very important role in economy of country. Manycustomers and investors believe these companiesactivities. Therefore Firms must manage their portfolio

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management in efficient manner. An investors totalholding diversified in the beneficial resources to reducethe risk of the manufacturing firms. The diversification ofportfolio of investment is an important concept in financialmanagement.

In this survey, Risk and Return of the manufacturingcompanies is analysis. Capital of manufacturing firms issaid as inefficient. The following researcher identified asmain causes for the inefficient. Companies were notearned return according capital. Many companies werenot achieved return according faced the risk.

REFERENCES

Ahthur WC, Michael lS, Peter CY (1995). Risk and Return andInsurance 7th edition, (Mc Graw Hill Inc)Chales PJ (1994). Investment analysis Management 4th edition,(JOHN) Wiley and sons, IncHarry M (1950) Modern portfolio management page no674-684Jack CF (1991). Investment analysis Management 5 edition, (Mc GrawHill Inc)Jack CF, Stephen HA (1979). Portfolio Analysis 2th edition,(Pretice-Hall,Inc)Lawrence DS, Charles WH (1991). Intrudction to FiancialManagement 6th edition, (New yorl:Mc Graw Hill Inc)