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PE and EV/EBITDA Investment Strategies vs. the Market: A Study of Market Efficiency
Linköping University, Department of Management and Engineering.
Linköping University, Department of Management and Engineering.
2007 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Background:

The efficient market hypothesis states that it is not possible to consistently outperform the overall stock market by stock picking and market timing. This is because, in an efficient market, all stock prices are at their correct level, and there are no over- or undervalued stocks. Nevertheless, deviations from true price can occur according to the hypothesis, but when they do they are always random. Thus, the only way an investor can perform better than the overall stock market is by being lucky. However, the efficient market hypothesis is very controversial. It is often discussed within the area of modern financial theory and there are strong arguments both for and against it.

Purpose:

The purpose of this study was to investigate whether it is possible to outperform the overall stock market by investing in stocks that are undervalued according to the enterprise multiple (EV/EBITDA), and the price-earnings ratio.

Realization of the Study:

Portfolios were constructed based on information from five years, 2001 to 2005. Each year two portfolios were put together, one of them consisting of the six stocks with the lowest price-earnings ratio, and the other consisting of the six stocks with the lowest EV/EBITDA. Each portfolio was kept for one year and the unadjusted returns as well as the risk adjusted returns of the portfolios were compared to the returns on the two indexes OMXS30 and AFGX. The sample consisted of the 30 most traded stocks on the Nordic Stock Exchange in Stockholm 2006.

Conclusion:

The study shows that it is possible to outperform the overall stock market by investing in undervalued stocks according the price-earnings ratio and the EV/EBITDA. This indicates that the market is not efficient, even in its weak form.

Place, publisher, year, edition, pages
Institutionen för ekonomisk och industriell utveckling , 2007. , 81 p.
Keyword [en]
Efficient Market Hypothesis, Enterprise Multiple, P/E ratio, Relative Valuation, Anomaly, Stock Valuation
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:liu:diva-8232ISRN: LIU-IEI-FIL-A--07/0040--SEOAI: oai:DiVA.org:liu-8232DiVA: diva2:23073
Subject / course
Master Thesis in Business Administration (Magisteruppsats från Internationella ekonomprogrammet)
Presentation
2007-01-17, 00:00
Uppsok
Social and Behavioural Science, Law
Supervisors
Available from: 2007-11-30 Created: 2007-11-30 Last updated: 2012-04-24Bibliographically approved

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CiteExportLink to record
Permanent link

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Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • oxford
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf