1. Relationship between ‘risk’ and stock returns Mayur Agrawal Varun Agrawal Debabrata Mohapatra Sung Kyun Park Vikas Yadav

2. Risk 4: Price to Book Ratio P/B = Market Cap / Book Value of Equity Market Cap = Shares Outstanding * Market price per Share BV of Equity = BV of Assets – BV of Intangible Assets – BV of Liabilities

3. Compares market’s valuation of company to the value of company indicated by its balance sheets Low P/B ratio => Company undervalued => More Return Value Investors v/s Growth Investors

4. P/B Calculation CRSP data for Market Cap – Permno as primary key which tracks security COMPUSTAT data for Book Value of Equity – GVKey as primary key which tracks company Mapping between Permno and GVKey is not one to one

5. Permno  GVKey Used CCM (CRPS COMPUSTAT Merged) to get the mapping between permno and gvkey Steps: – Get gvkeys of all SnP500 constituents from 1962 to 2008 – Get data for all gvkeys from CCM with fields gvkey lpermno (same as CRSP permno) effective start date effective end date

6. Permno  GVKey (conti…) – The previous step gives GVKey  Permno mapping Process it to get Permno  GVKey – Permno mapped to (Eff Begin Date, Eff End Date, GVKey) tuples EX:

7. Issues with the Mapping – Using CCM could only get 1450 permno as compared to 1526 in CRSP – The permnos that are present in the mapping can also have some data missing Proposed Solution – Manually finding the mapping of the missing 76 securities (last resort) – Use Ticker information to write a program to complete the mapping (investigating)

8. Results Dec 1999 Dec 2001 Dec 2002

9. Growth stocks have high P/B ratio because – Market’s evaluation is more that companies value Technology Sector has high P/B ratio because – Intangible assets like intellectual property rights etc. are of much more value – Intangible asset is a negative term in the denominator Dot com Bubble (till mid 2000) and Burst (2001 and 2002)

10. Dec 2006 Dec 2004 Dec 2005 Dec 2003

11. Dec 2008 Companies with low p/b ratio tend to perform better