ANALYSIS OF SECTORAL INDEX STOCK RETURNS AND RISK (VOLATILITY) ON THE CROATIAN FINANCIAL MARKET

A common postulate among investors is that there is a positive relationship between stock returns and risk (volatility), meaning that investors expect higher returns on investments with higher exposure to risk and vice versa. This paper examines the relationship between index stock returns and volatility of returns in a small, undeveloped and emerging stock market, such as the Croatian stock market. In this analysis we use data from the Zagreb Stock Exchange. We focus on a comparison of stock returns between the general stock index CROBEX and five sectoral stock indexes: CROBEXindu (industry), CROBEXkons (construction), CROBEXnur (production and processing of food), CROBEXtran (transport), CROBEXturi (tourism). For all indexes, through the period from 2016 until 2018, weekly returns, volatility (standard deviation) and their averages were calculated. The calculated returns and volatility of each sectoral index were then compared to the average returns and volatility of the general CROBEX index. By using rationing volatility, expressed as standard deviation of returns and average returns, it is possible to calculate the inversed coefficient of variation. The inversed coefficient of variation results in the number of return units for each risk unit, therefore providing insight into which sectoral stock index provides an optimal return to risk ratio. Furthermore, we especially focus on the tourism sector index (CROBEXturi) due to its importance for the Croatian economy, amounting to up to 20% of its annual GDP. Total investments in this sector are expected to grow in the future, as they have in past years. The goal of this research is to determine if returns of sectoral stock indexes from the Zagreb Stock Exchange are in a positive relationship with risk. As expected, the returns of observed stock indexes confirm the postulate of higher returns in all the considered industry sectors, where stock indexes with higher returns, although more profitable, are at the same time also a riskier investment. Conclusions from the analysis are that, through the observed period, sectoral stock index CROBEXturi delivers the best risk to returns ratio confirming considerable investment incentive in tourism.