Distribution of Risk and Return: A Statistical Test of Normality on Dhaka Stock Exchange

Abstract

The present study deals with the normal distribution of risk and return of the capital market of Bangladesh. Normal distribution of return is an essential assumption in the field of efficient market hypothesis which posits that the returns of a market must follow the random walk behaviour. Again it is an integral part of Capital Asset Pricing Model, which suggests that if an investor wants to get higher return then he must consider higher risk, this denotes to the normal distribution of risk and return. This study has used a set of parametric and non-parametric tools to examine the returns calculated from the three indices of Dhaka Stock Exchange: DGEN (from 2002 to 2010), DSE20 (from 2002 to 2010) and DSI (from 2006 to 2010). As positive skewness and kurtosis are evident in most of the cases, the returns are found to be suffering from some extremities. Daily, weekly and monthly returns are not normally distributed which shows the contra-evidence of random walk behaviour of market return. Besides the inconsistency between risk and return (daily and weekly) is found, which suggests that additional return may be achieved without having exposure to additional risk.

Keywords: Dhaka Stock Exchange, Efficient Market Hypothesis, Kurtosis, Non-parametric Test, Normal Distribution, Parametric Test, Risk and Return, Skewness.

JEL Classification: G14