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We had discussed how risk and return are two sides of the same coin (read the series here). Also, we looked at the high price correlation of Reliance vs. the Nifty 50 index. The question yet to be answered is this: given a choice between owning Reliance and owning the NIFTYBEES ETF, what should an investor do?
Lets look at the pros of owning the NIFTYBEES:
- The NIFTYBEES represent the broader market. Investors get a diversified, market-weighted portfolio.
- 8.73% of the NIFTYBEES is, in fact, Reliance. So investors do get a slice of exposure to Reliance.
Now what would be the disadvantages of owning the NIFTYBEES vs. owning Reliance outright?
- If Reliance out-performs the index, then investors only get a small (8.73%) of the increase
- Investors may not want to buy the entire index and might prefer a concentrated portfolio of just resource stocks, of which Reliance is one.
To answer this question, lets turn our heads to two measures: alpha and beta (discussed here.) Reliance has an alpha of -0.0002946529 and a beta of 1.027928. What this shows is that Reliance actually underperformed the index (a –ve alpha) and it more or less tracked the index (a beta close to 1; confirmed by our correlation study.)
We are in the process of rolling out alpha and beta of individual stocks against the Nifty 50 index. Stay tuned!
