Lecture#14 - Ec 136 Financial Economics Lecture 14 October 20 Outline for today 1 Valuation ratios and the stock market outlook 2 Stock picking

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Unformatted text preview: Ec 136, Financial Economics Lecture 14 October 20 Outline for today 1. Valuation ratios and the stock market outlook 2. Stock picking: Value line. 3. Mutual funds. 4. Mutual fund performance. www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings: BKM Chapter 4 1. The long term stock market out- look & In the past, when P=E away from historic mean, price adjusts to bring it back. & After recent events, valuation ratios are close to historic mean = ) no prediction { Lowest P=E was around 6 & Maybe since 1980s we are in a new era { Perhaps investors today are less scared of stock market than a generation ago. { Suggests mean P=E has increased permanently = ) we are below new mean. 20 25 30 35 40 45 50 r ice-Earnings Ratio 1901 1966 2000 S&P 500 Price-Earnings Ratio 1981 1929 18.77 5 10 15 1860 1880 1900 1920 1940 1960 1980 2000 2020 Pr Year 1921 Historic Average Caveats 1. Prices versus returns. & Price growth is only one component of return. & But similar results can be derived for returns as well. 2. Should we trade on this? & Predictions are for a ten year horizon. & Market can move against you next year. 3. Maybe we overlooked something. & Historically, people have used the dividend yield to predict the market....
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This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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Lecture#14 - Ec 136 Financial Economics Lecture 14 October 20 Outline for today 1 Valuation ratios and the stock market outlook 2 Stock picking

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