Testing Stock Market Efficiency Using Risk-Return Parity Rule

Although the concepts of efficiency have been extensively researched, an efficient stock market has remained elusive. The subject is of particular concern in India now because of the increasing dependence on the capital market for financing industrial growth. S K Barua and V Raghunathan presented two articles in Vikalpa (July-September 1986 and July-September 1987) arguing that the Indian capital market was inefficient. Using Reliance share prices, they tried to demonstrate that schemes yielding returns unrelated to risk existed. Srinivasan and Narasimhan in this article question the methodology used by Barua and Raghunathan and elaborate on the concepts of risk-return parity and efficiency, drawing a distinction between information efficiency and market efficiency.