Basic Research Journal of Business Management and Accounts ISSN 2315-6899 Vol. 1(5) pp.

78-83 December 2012

Available online http//www.basicresearchjournals.org
Copyright 2012 Basic Research Journal

Review

Risk Analysis and its impact on return: A Study on

Manufacturing 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 economical
development. Sri Lanka's apparel manufacturing sector is highly developed and has evolved as an
export oriented industry for over two decades. Currently around more companies in Sri Lanka produce
a 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 manufacturing
sector. Portfolio management is the collection of different investments that make up on investors total
holding. Risk and Return of the portfolio management is very important aspect in the financial
management. Analysis of portfolio management of manufacturing sector is very useful for customers
and investors. Data were obtained from the CSE handbook and web sites. The efficiency of the portfolio
management of manufacturing sector is analysis based on the portfolio management ratio analysis and
correlation analysis. The detail of the analysis is explained in the study in detail. As a result of the
analysis it could be seen that positive strong correlation between the risk and return. It leads a high
risk on the investors fund to earn high return of manufacturing sector.
Keywords: Risk Management,Performance,Return
INTRODUCTION
Sri Lanka's apparel manufacturing sector is highly
developed and has evolved as an export oriented
industry for over two decades. Currently around more
companies in Sri Lanka produce a wide range of products
including branded names -most of them catering to the
international market. Today clothing labelled "Made in Sri
Lanka" can be found in major department stores in the
USA, UK, Germany and Australia. This research is aimed
to analysis the Risk and Return of manufacturing firms in
Sri Lanka. Portfolio management is the collection of
different investments that makeup on investors total
holding. Risk and Return of the portfolio management is
very important aspect in the financial management.
Portfolio management will involve the various
investments such as many different types of financial
assets. Risk involved in such investment and derived
from them. Every manufacturing firm is dependent on its
total advances portfolio has made manufacture
vulnerable to risk in- non- performing advances, which is
turn has led to liquidity and the long-term sustainability of
such profits depends to large extent on identifying and
managing the multitude of risk facing the manufacturing
companies. Currently investments of manufacturing

companies are considered as a very important aspect of

the development of any country. It is an investment only
the main profit of such books depend, in conformity to
this principal analysis on portfolio management of
manufacturing companies is launched.
The
government's
industrial
policy
includes
encouraging investment in industries in which it believes
Sri Lanka has a comparative advantage. The Board of
Investment (BOI) offers various incentives for investment
in five industry segments: electronics and components for
electronic assembling, industrial and machine tools (a
new emphasis), ceramics and glassware, rubber-based
industries, and light and heavy engineering. Another key
policy element is deregulation, and in 2001 a committed
on deregulation was formed to study regulatory
impediments to Sri Lanka's industrial development.

Statement of problem
Research problem focused here is risk of the manufacturing

Premkanth. 79
sector affect the return and efficiency of portfolio
management of manufacturing firms return will vary
according to the risk return of manufacturing firms will
determine the efficiency of portfolio management. This
research aimed in whether risk of the manufacturing
sector affects the return and efficiency of portfolio
management.

Objective of research
The manufacturing system and Product play an important
role in the daily life of the general public. Therefore it is
important system in details. The followings are the
objectives of this study.
1.
The compare the desired relationship between
investment risk and return.
2.
Portfolio management is an important feature in the
activities of manufacturing sector. The manage the
various risk of the manufacturing companies.

Significance of the study

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

Literature Review
P. David, T. Yoshikawa, M.D.R Chari and A.A. Rashed
argue the effect of foreign ownership on strategic
investment in Japanese corporations by developing and
testing two competing perspectives, they found that
foreign ownership is move positively associated with
strategic investments for form with growth opportunities
than those lacking such opportunities. The relationship is
robust across both types of strategic investments studies.
R and D capital intensity.
Porter(1992) explain the effect of combing banking and
non bank. Financial activities on banking organizations
risk and return. In general, securities activities, insurance
agency, and insurance underwriting are all risker and
more profitable than banking activities. They also have
the potential to provide diversification benefits to banking
organizations. While real estate operations are more
profitable than banking. Real estate development may
not be real estate activities in general and their
diversification benefits for banking organization are less
clear.
The Economist (2002) examines risk, return and the

prospects for portfolio diversification among major

painting and financial markets over the period 1976-2001.
The art markets examined are contemporary masters,
franch impressionists, Morden European, lath century
th
European, old master, surrealists,20 century English
and modern us paintings. The financial markets comprise
us treasury bills. Corporate and government bonds and
small and large company stocks in common with the
literature in this area, the study finds that the returns on
paintings are much lowers and the risk much higher than
conventional investment markets, move over, while low
correlation of returns suggest that opportunities for
portfolio diversification in art works also and in
conjunction with equity markets exist, the construction of
Markowitz mean-variance efficient portfolios indicates
that no diversification gains are provide by art in financial
assets portfolios. However
diversification benefits in
portfolios comprised solely of art works are possible, with
th
contemporary masters, 19 century European, old
th
masters and 20 century English paintings dominating
the efficient frontier during the period in question.
Zebras and Cabman (1984) presented a set of
summary statistics of returns and risks for asset classes
that may be used as benchmarks for establishing
allocation levels, a subsequent article comments on how
customized benchmarks may provide a more appropriate
basis of comparison than generic indexes (McIntosh,
1997).
Harein investigate the risk and return characteristics of
risk arbitrage for a sample of 187 stock swap offers in the
form of collars for the 1994-2003 periods. Using cross
sectional analysis, they find that initial arbitrage spread is
significantly positively correlated with acquirers stock
volatility and the deal duration. using time series analysis,
we identify a significant non-linear relationship in risk
return profile for risk arbitrage portfolio: both strategy 1
(long the target for the fixed value collar offers; long the
target and short the acquirer for the fixed ratio collar
offers) and strategy 2.(delta hedging) produce returns
that are strongly positively correlated with the market
return in a severely declining market and are not
significantly correlated with the market return in a flat or
rising market.
Sampling design
Table 1 below indicates clearly the sample of this
research. Manufacturing sector is producing products and
services, in Sri Lanka. There are 32 companies are
available but researcher selected the 12 companies for
this 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
Sri Lanka

Type of sector
Manufacturing

No. of companies
available
32

No of companies
selected
12

Figure 1. The following figure illustrates the conceptual model

Table 2. Operationalization
Concept
Risk

Variable
Overall
Risk

Indicator
CAPM Equation

Measurement

Market risk

Dividend cover

Risk = Risk free + Risk premium

Rc =Rf + (Rm - Rf )

Earning yield

Return

Earning

Profit

Earning per share

Dividend per share

Earning per share

ratio
Price earning ratio

ROE

ROCE

data are collected from books, journal, magazines and

annual report ect. Researchers are use to secondary
data method. Collected data from secondary sources will
be analysed. For this purpose, researchers use the
following analysis method.
1. Ratio analysis
2. Risk analysis (CAPM Model)
3. Graphic analysis

Earning per share

Market value
Profit after tax and preference share dividend
Number of equity shares(ordinary share)
Market price per share
Earning per share
P A IT and preference share dividend*100
Equity share holders fund
Profit before interest and tax * 100
Capital employed

Conceptual model
See figure 1 above
Operationalization
See table 2 above

Premkanth. 81

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

Dependent variable
Year
2005
2006
2007
2008
2009

Return
2.73
69.59
146.12
203.17
233.07

Risk
6986.72
8795.74
13256.37
19721.37
23226.22

Table 4. Correlations

**Correlation is significant at the 0.01 level

Table 5. Coeficiente, a dependent variable: Return

a
Coefficients

Model
1
(Constant)
Risk

Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
-59.356
30.562
.013
.002
.969

t
-1.942
6.784

Sig.
.147
.007

a. Dependent Variable: Return

Hypotheses
The following hypotheses are formulated for the purpose
of this study.
H1:- Manufacturing companies portfolio management is
efficiency.
H2:- High degree of risk lead to high degree of return.
Correlation coefficient analysis
In this study, which is undertaken to find out the
relationship between the risk and return of manufacturing
firms. Correlation analysis is carried out in order to find
out the nature of relationship between the variable based
on the value of correlation coefficient, Here, Table 3 and
4.
According to the coefficient correlation, there is positive
moderate relationship between risk and return during the
2005-2009. So conclusion may be made, that there is
positive relationship between the risk and return.
Through this finding, manufacturing firms can derive the

high return from high-risk involved investment.

2

Coefficient of determination (R )
A more useful indicator will be the coefficient of
determination, which is defined at the squared value of
Pearlmans moment correlation coefficient. The
coefficient of determination of the Manufacturing firms
during last 5 years as showing the following table 4.10.
Table 5.
2
The coefficient of determination rp is 0.969. It means
that 96.9% of variability of risk can be accounted. For by
its 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 that
how the relationship is between the variables and but the
nature of the relationship is between the variables. It is
not a proper way to describe the relationship exactly
between the variables by using the correlation analyzes.
Therefore regression analyses are the most suitable way
in order to find out the exact relationship between the
variables.

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

Table 6. Coefficient

a
Coefficients

Model
1
(Constant)
Risk

Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
-59.356
30.562
.013

.002

t
-1.942

Sig.
.147

6.784

.007

.969

a. Dependent Variable: Return

Table 7. Null Hypothesis of the Manufacturing
firms during the last 05 years (2005-2009) on
the basic of risk weighted
Multiple R
R Square
Adjusted R Square
Value of F
Significance F

Regression analysis
Regression analysis made to find out the equation, which
describes the relationship between the variable. From
this analysis the dependent variable can be forecasted
through the independent variable, regression line was Y=
a+bx. Here the regression summary output is obtained
through the statistical analysis. This output is given in the
table 6.
In this period, Coefficient of regression is 0.013, it
indicates that for every year increase of the independent
variable return, will increase by 0.013(Rs 000) that is Rs
13. On the basis of risk-weighted base, the coefficient of
regression is 0.013. It indicates that for every year
increase of the dependent variable return will increase by
0.013 that is Rs 1.3. Hence these analyses provide the
hypothesis of high degree of risk lead to high degree of
2
2
return.This fitness is shown by the rp in the rp summary
2
output. This value rp is 96.9% (based on risk weight)
therefore only 96.9% of can be explained through this
regression equation. That is the return affects the risk the
risk only 96.9%. Rest of 4.1% denotes the other factors,
which determines the return. However the rp2 subjective
therefore f-test examine the fitness of regression
equation.

0.969
0.939
0.918
46.021
0.007

0.007. Here, Null hypothesis is rejected. And the

alternative hypothesis is accepted. Therefore the
regression formula is accepted. Thus regression formula
helps to explain the change of return by the effect of risk.

Finding of the research.

The following are identified based on the analysis of the
Risk and return of the of the manufacturing firms.
When analysis of the relationship between the risk and
return, Return was calculated through ratio analysis and
Risk was estimated to use CAPM model. The correlations
between 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 same
way when risk decreases, the income also decreases.
Finally the relationship between manufacturing sector risk
and return could be conformed by its regression analysis.
During research since null hypothesis rejected other
hypothesis has been recognized and it is able to reveal
the fact that there is direct liner relationship between risk
and return.

Hypotheses Testing
Null Hypothesis
Here null hypothesis means no relationship presumes to
risk and return. Now researcher can take the null
hypothesis by the regression output. The following output
show below. (On the basic of risk weighted) Table7.
Regression equation could be accepted at 5% of
significant level through the probability related to the
value of F. The null hypothesis can be rejected because
of the probability of significance level is less than 0.05 is

It is proper to prove the hypotheses, which are put

forward in this research compared to the findings of the
research, got from the data. In this view.
H1- Manufacturing firms, portfolio management is
efficiency
This 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 the
manufacturing firms is not sufficient level. Hence
portfolio management of the manufacturing firms is

Premkanth. 83

inefficiency.
H2- High degree of risk lead to high degree of return
This is accepted on the basis of finding got from the
correlation analysis and regression analysis. According to
this analysis, this hypothesis is accepted. Hence this
research, the positive linear relationship between risk and
return could be proved. Therefore when risk of
investment increases, the return from investment also
increase

management in efficient manner. An investors total

holding diversified in the beneficial resources to reduce
the risk of the manufacturing firms. The diversification of
portfolio of investment is an important concept in financial
management.
In this survey, Risk and Return of the manufacturing
companies is analysis. Capital of manufacturing firms is
said as inefficient. The following researcher identified as
main causes for the inefficient. Companies were not
earned return according capital. Many companies were
not achieved return according faced the risk.

CONCLUSION
REFERENCES

A Risk and return of the portfolio management is the

collection of different investments that make up investors
total holding. A portfolio management might be the
investment in stocks and shares of investors or
investment in capital projects of company finance is very
important to every organization to play their activities
successfully. In Sri Lanka, Manufacturing companies are
play a very important role in economy of country. Many
customers and investors believe these companies
activities. Therefore Firms must manage their portfolio

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