Relative-valuation based investment stategies : evidence from China.

• Main Authors: Hong, Wai Chong., Lee, Royston Yit Kar., Liw, Nick Weijian.
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2009
• Subjects: DRNTU::Business::Finance::Equity
• Online Access: http://hdl.handle.net/10356/15276
• Institution: Nanyang Technological University

This study examines two investment strategies based on relative valuation using price-toearnings (PE) and price-to-book value (PB) multiples in China stock markets. The first investment strategy uses simple sorting of stocks according to their actual PE and PB multiples. The second strategy involves two steps. The first step, we regress multiples on their fundamental determinants and estimate the warranted multiples as the predicted values of regressions. The second step involves classifying firms that have actual multiples higher (or lower) than their warranted multiples as overvalued (or undervalued) firms and investigate the difference in returns. The first strategy suggests that portfolios consisting of low PE and PB multiples yield a higher return than the portfolios consisting of high PE and PB multiples. However, after controlling for fundamentals in our second investment strategy, our findings suggest that that profiting from mispricing in the stock market using multiples is not as easy as it appears.