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Alternative Industry Performance and Risk

Published online by Cambridge University Press:  19 October 2009

Frank K. Reilly  and
Eugene F. Drzycimski
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Extract

Industry analysis has long been a cornerstone in both the academic and professional segments of the investment community. Concepts such as “an industry providing downside protection” or “another is certain to outperform the market” have been prevalent throughout the profession. The importance of industry analysis in terms of stock price changes has been suggested by King, while the influence of the industry factor on corporate earnings changes has been documented by Brown and Ball. These studies and others have indicated that industry analysis has been an important part of security valuation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 3 , June 1974 , pp. 423 - 446
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

1 King, Benjamin F., “Market and Industry Factors in Stock Price Behavior,” Journal of Business, vol. 39, No. 1, Part 2 (January 1966), pp. 139–190.CrossRefGoogle Scholar

2 Brown, Philip and Ball, Ray, “Some Preliminary Findings on the Association between the Earnings of a Firm; Its Industry, and the Economy,” Journal of Accounting Research, vol. 5 Supplement (1967), pp. 55–77.CrossRefGoogle Scholar

3 For a further discussion of this point of view and a summary of the King results and the Brown and Ball study, see Reilly, Frank K., “The Misdirected Emphasis in Security Valuation,” Financial Analysts Journal, vol. 29, No. 1 (January–February 1973), pp. 54–57CrossRefGoogle Scholar. The King study is also summarized in Brealey, Richard A., An Introduction to Risk and Return from Common Stocks (Cambridge, Mass.: MIT Press, 1969), pp. 55–65.Google Scholar

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14 Ibid.

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16 Ibid., p. 7.

17 The expectations of industries with beta values less than one are rather small based upon the findings of Blume, Ibid., p. 6, in which only seven out of 4,357 betas were negative (0.16 percent).

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19 The market average originally selected was the New York Stock Exchange Composite Index. The prices available on the NYSE Composite Index were weekly closing prices as compared with Thursday closing prices used for the computation of the thirty Barron's Industry Averages. Preliminary results indicated that the one-day difference in closing prices between two indexes caused a substantial change in the relationship between the two. Therefore, the Standard & Poor's 500 was adopted because of the availability of Thursday closing prices for this series.

20 Standard S Poor's Trade and Securities Statistics Security Price Index Record. (Orange, Conn.: Standard & Poor's Corporation, Publishers, 1970 edition)Google Scholar. Standard & Poor's four main group indexes are computed at five-minute intervals. S & P does not publish these frequent readings, but does maintain a record of them. Indexes based on hourly readings are published in the Daily News Section of S & P's Corporation Records. Daily high, low, and closing indexes are published in their weekly “Outlook” and their monthly “Current Statistics.”

21 ” Reilly and Sherr, “The Shift Method.” The subperiods were selected on the basis of when a major change appeared in direction of the DJIA. Given the change in direction, the daily figures surrounding the time of change were examined to discover the day when the closing average was at its peak or trough. These peaks and troughs generally conform to those specified in Bellemore, Douglas H. and Ritchie, John C., Investment Principles, Practice and Analysis (South-Western Publishing Co., 1969), pp. 96–97Google Scholar. They are also quite similar to the periods in Van Horne, James C., “New Listings and Their Price Behavior,” Journal of Finance, vol. 25, No. 4 (September 1970), p. 792.CrossRefGoogle Scholar

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25 Blume, “On Assessment of Risk,” pp. 6–7; Levy, Robert A., “On the ShortTerm Stationarity of Beta Coefficients,” Financial Analysts Journal, vol. 27, No. 6 (November–December 1971), pp. 55–62.CrossRefGoogle Scholar

26 Latané” and Tuttle, “Framework for Forming,” Brown, Philip and Ball, Ray, “An Empirical Evaluation of Accounting Income Numbers,” Journal of Accounting Research, vol. 6 (Autumn 1968), pp. 159–178.Google Scholar