Testing the Performance of Graham’s Net Current Asset Value Strategy in Indian Stock Market

Abstract

Using the data on stocks listed on Bombay Stock Exchange (BSE) for the period spanning from 1996 to 2010, the present study intends to examine the relevance of stock selection based on net current asset value rule of Benjamin Graham in Indian capital market. This valuation metric is aimed at buying the securities whose prices are lesser than the net current assets of the company. The returns derived from the stocks meeting the criterion are analysed using one sample t-test, capital asset pricing model (CAPM). The results revealed that the portfolio selected on the basis of this criterion provided significantly positive mean market adjusted returns in maximum number of years when the holding period of the portfolio is extended from 12 months to 24 months. The significant abnormal returns derived through CAPM model, however, cannot be considered conclusive due to lesser explanatory power of the model. Nevertheless, the portfolio showed lesser volatility than the market portfolio, thereby implying that the fund managers can also use it as an investment tool for risk management due to lesser risk and positive market adjusted returns.