The Valuation of Security Analysis / Alex Kane, Alan J. Marcus.

Format:

Book

Author/Creator:

Kane, Alex.

Contributor:

National Bureau of Economic Research.

Marcus, Alan J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1958.

NBER working paper series no. w1958

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1986.

Summary:

Active portfolio management is commonly partitioned into two types of

activities: market timing, which requires forecasts of broad-based market

movements, and security analysis, which requires the selection of individual

stocks that are perceived to be underpriced by the market. Merton (1981) has

provided an inciteful and easily-implemented means to place a value on market

timing skills. In contrast, while a normative theory of stock selection was

outlined long ago in Treynor and Black's (1973) work, no convenient means of

valuing potential selection ability has yet been devised.

We present a framework in which the value of a security analyst can be

computed. We also treat market timing ability in this framework, and

therefore can compare the relative values of each type of investment

analysts. We find that stock selection is potentially extremely valuable, but

that its value depends critically on the forecast interval, on the correlation

structure of residual stock returns, and on the ability to engage in short

sales. Finally, we show how to modify the value of selection for the

important case in which analysts' forecasts of stocks' alphas are subject to

error.

Notes:

Print version record

June 1986.