Abstract
This study examines the risk and return profile of common stocks, Treasury bills and inflation in Sri Lanka over the 13-year period 1985-97. The evidence shows that, on average, common stocks earned nominal returns, without dividends, of 24.8 percent with a standard deviation of about 49.6 percent, a dividend yield of about 2.6 percent with a standard deviation of 1.2 percent, dividend-adjusted nominal returns of about 27.4 percent, dividend-adjusted real return of about 16.1 percent, and a dividend-adjusted risk premium of about 10.6 percent. Treasury bills provided an average yield of 16.9 percent with a standard deviation of 3.3 percent. The inflation rate averaged 11.3 percent with a standard deviation of 5 percent. The real risk-free rate in the Sri Lankan economy has averaged 5.6 percent with a standard deviation of 5.4 percent. There have been seven major market trends; four bull markets and three bear markets. Five industries outperformed the market from a relative risk standpoint. They are Chemicals and Pharmaceuticals, Services, Bank Finance and Insurance, Beverages Food and Tobacco, and Oil Palms in the descending order of performance