Summary
Stock price instability or volatility is a measure of risk in holding common stocks, and indeed, it is the basic element in the calculation of Sharpe's beta. Value line publishes weekly, a ranking of stock price stability for every firm in their database. The higher the Value line ranking for price stability, the more likely they would recommend it as a safe investment. Prior work on this subject has considered to some degree the underlying macroeconomic environment, but there have been no studies that measured the financial characteristics of those firms that achieved the highest Value line ratings for price stability in a period of economic recession. Our analysis tests for significant differences in the financial profiles of those firms that achieved the highest Value line ratings for price stability in a period of economic recession and companies selected at random during the same period, and from the same industries. A unique financial profile is established for the highest rated group, and it is suggested that the profile may be used to predict firms that may achieve high levels of stock price stability in the event of future economic downturns.
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Extract
On the Financial Characteristics of Firms That Experienced the Highest Levels of Stock Price Stability in a Period of Economic Recession
INTRODUCTION
The price level stability of common stocks is considered an important factor in the safety of equity investments. Indeed, the lack of stability, or a high measure of volatility is the basic element in Sharpe's beta, a familiar tool used to measure the systematic (relevant) risk in a portfolio. Safety of investment has been of interest to investors, investment counselors, financial managers, and academicians for many years, and in periods of economic recession it becomes of paramount importance.The period from March 2001 to November 2001 was identified by the National Bureau of Economic Research's Business Cycle Dating Committee, as a period of economic recession in the United States (Associated Press, 2003). However, the downturn in the economy had started much earlier. On Jan. 14, 2000, the Dow-Jones Industrial Average closed at 11,722.98. Thatwas an all-time high, but over the next two years, the Dow lost 38.7% of its value as it fell to a low of 7,286 on October 9th 2002 (Dow-Jones, 2006). The summer of the year 2000 was characterized by a great deal of political activity. It was a presidential election year and the race was apparently going to be very close. Thus, too little notice was given to such announcements as J. C. Penny declaring their intentions to close many of their stores, including stores in their Eckerd's chain, that were just marginally profitable. The action of Penny's and other firms was to result in many layoffs in the retail industry (Payne & Daghestani, 2000). During the next two years savings and retirement funds were si...See the full content of this document
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