Sunday, February 05, 2006

Does one gain by investing in stocks to be included in the Sensex ?

Earlier in the week Kaushik had tested the hypothesis -

whether it is profitable to invest in stocks that are included in the Sensex or the Nifty ?

Taking his idea a step further, I tested another hypothesis (ofcourse, not in the real statistical sense) -

Is it profitable to invest in stocks that are to be included in the Sensex ? The difference in this was that I computed returns between the period of announcement, of the inclusion of a new scrip in the index, and the actual inclusion.

Of the 16 scrips studied, 11 outperformed the Sensex while five underperformed. On more than five instances, the outperformance was over 10 per cent whereas on two instances the underperformance was as high as 39 per cent. The two extreme cases in this study - Satyam Computers (underperformance - 38.9%) and Zee Telefilms (-25.8%) were largely a result of the dotcom bust that took place in 2000.


Note: These are not annualised returns and they do not include effect of dividends, if any.

If one keeps these two cases aside, the study does indicate an overall outperformance by scrips to be included in the Sensex between the period of announcement and the actual inclusion.

Thus taking a leaf out of Kaushik's book - the trading strategy would be to buy scrips that are to be included in any of the benchmark indices on the day of announcement and sell it on the day the same is included in the index.

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