Analysis Sensex - Dollex 30

1. Historical return and risk profile of SENSEX, DOLLEX 30

Refer to the following table for the returns of the different horizon. SENSEX has an outstanding performance in the past one year with a yield of 13.86%. Although the index went downward during 2015 and 2016, the annualized return for the past five years is still as high as 11.446%. The index reflects the dramatic growth of the economy in India.

However, DOLLEX 30 has a much lower return for the same period, with a five-year yield of only 6.053%, half of the SENSEX.

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Both the indexes are not satisfactory in outperforming the comparable S&P 500 index. In most of the time in the past five years, SENSEX’s return is slightly lower than S&P 500, following by the DOLLEX 30. SENSEX has a negative excess return while DOLLEX 30 has a positive one. If we assume that the CAPM is correct, SENSEX’s performance has not performed as well as expected given its risk level. However, does it imply the SENSEX has a higher investment risk? What makes the difference between SENSEX and DOLLEX 30?

1. Risk analysis

The Beta of SENSEX with S&P 500 is 0.663 which is relatively low. DOLLEX 30 has even lower Beta of 0.173. They do not have high exposure to the systematic risk. What makes the difference? One of the primary impacts is from the currency fluctuation.

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U.S. Dollar has increased more than 20% relative to Indian Rupee from 2012 to 2017. As a result, in contrast to SENSEX, DOLLEX 30 only has a moderate outcome in this period. On the one hand, the INR depreciation has offset the increasing of SENSEX, and it makes the return difference; on the other hands, USD-denominated DOLLEX 30 has lower Beta which leads to a positive excess return.

But the risk has never been a flat distribution.

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The table is a summary of the volatility. It indicates that the volatility differs for the various horizon and period. The risk for the one-month investment is lower than the six-month, while the situation is opposite for three-year and five-year. The investment is not necessarily risky for investors with short horizons. 

The graph explains the story behind: volatility is various in the different term. Short horizon may have lower risk than the average risk for the long horizon. Take the 2014-to-2017 period as an example. SENSEX is exposed to relatively higher volatility in 2015-2016, raising the average risk between 2014 and 2017. Therefore, investors held the investment during 2016 to 2017 has experienced lower risk than investors who own the investment for three years from 2014 to 2017.