An Analysis of Common Stock Price Ratios

Abstract

This paper is a quantitative analysis of annual price ratios of common stocks. The price ratio, Pt+l/Pt, is the ratio of price at the beginning of year t + 1 to price at the beginning of year t.0 Cross-section correlation coefficients between price ratios and other selected variables are derived for two samples of common stocks; these coefficients are then tested for stability over time. Finally the ability of the explanatory variables to discriminate between the best and poorest price performers is investigated. Table I shows the distribution of price ratios for a broad range of common stocks. The table was constructed from data taken from the New York Stock Exchange fact book and indicates the distribution of percentage price changes of all listed common stocks in years ended December 31, 1956 through December 31, 1963. As the table shows, the interquartile spread or difference between the percentage price change of the upper and lower quartile stocks was relatively large at about 30 percentage points and fairly stable over the years reported on. This consistent annual pattern of interquartile spreads is to be contrasted with the wide year-to-year variation in the median percentage price change, indicating there is a strong intercorrelation among stock price movements. In other words, most stock prices either move up together or down together in any particular year, but whichever is the case the percentage point difference between the typical large price change and the typical small price change remains about the same. Therefore if an investor can discrim-