FIN 302 Lecture Notes - Lecture 24: S&P 500 Index, Investment Performance, Capital Asset Pricing Model
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Session 24: efficient market, anomalies, and investing, part 2. Investment performance of stock recommendations by professional analysts. Investment advisors devote their lives to making stock recommendations and searching for underpriced assets. If so, this would be strong evidence against market efficiency. Purchase stocks with the most favorable recommendations and short-sell stocks with least favorable recommendations. Annual return of 4%, but very high turnover: > 400% After considering transaction costs, the net return on the strategy is not statistically different from zero. Focus on the strong recommendations from the analysis. Following the accommodations of the stock analysts are not always the best for obtaining persistent returns. Jim cramer"s books have sold over a million copies, and his show is watched by 400,000 viewers per night. Cramer"s recommendations experience higher trading volume and a short-lived increase in price, which quickly reverses. Risk-adjusted returns are not significantly different from zero.