DANCEST 805 Lecture Notes - Lecture 11: Value Investing, Market Trend, Consensus Forecast

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2 Nov 2020
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Article 6: identifying expectation errors in value/glamour strategies: a fundamental analysis approach. Prior research documents that various measures of relative value (e. g. book-to-market, e/p) predict future stock returns. The collective evidence from this research highlights the tendency of value" stocks to outperform glamour" firms. However, the source of this return differential remains a subject of debate (some argue that the returns reflect compensation for risk; others argue that the value/glamour effect is an artifact of mispricing) Value stock: a security trading at a lower price than what the company"s performance may otherwise indicate. Glamour stock: a popular stock characterized by high earnings growth rate and a price that rise is faster than the market average in a bull market. Mispricing-based explanations contend that measures of relative value reflect systematically optimistic/pessimistic performance expectations for glamour and value firms, respectively the value/glamour effect captures the price corrections arising from reversal of expectation errors.

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