Abstract:
This paper attempts to test fundamental theory of finance which is risk and return
relationship. For this purpose the manufacturing sector listed in Colombo Stock
Exchange was selected. The researchers used marked model to measure the risk
factor of the selected companies. The sample period was 2000 to 2006. As the proxy
to calculate market return for the market model the ASPI was applied. The finding
was the beta that is a measure of the volatility, or systematic risk, of a security or a
portfolio in comparison to the market as a whole is not stable through time. Another
interesting finding is the systematic risk component is below the market risk of most
companies. Therefore beta is not a proper indicator of company systematic risk
factor. These findings will be important to various stakeholders especially for prospect
investors, share brokers, managers and regulatory bodies etc.
