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Relative value analysis Ney, David James


This study is an empirical analysis of a technical stock selection technique. A random sample is studied for the period 1956-1967. Portfolios are constructed and managed by building a model containing three variables--relative earnings, relative price-earnings and relative prices. The objective of the study is to gather evidence which will test the hypothesis that relative value analysis selects portfolios whose rate of appreciation is greater than that of a buy-and-hold strategy or that of the market. The results of the analysis support the hypothesis. With few exceptions the strategies' rates of appreciation are up to several percentage points higher than the rate of appreciation of both the market and the buy-and-hold strategy. Secondly, portfolios which are constructed using both fundamental analysis and relative value analysis show even higher rates of appreciation. As a consequence of the results obtained, a general conclusion and several specific conclusions are reached. The general conclusion formed is that relative value analysis is a profitable stock selection technique. More specifically, it is concluded that: (a) Trends in stock prices do exist. (b) Fundamental analysis serves an important function in selecting securities to maximize portfolio returns. (c) The analyst who uses the relative value method will make buy and sell decisions which result in the selected portfolio outperforming the market.

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