Question

1. Randy and Len use the same set of historical data to simulate the performance of various trading strategies. Randy constructs a “value” strategy using the P/E ratio to determine which stocks to buy and sell. Len constructs a “profitability” strategy using ROE to determine which stocks to buy and sell. Both simulated strategies have the same mean and standard deviation of monthly returns. It is later determined that the historical data included delayed prices instead of real-time prices. Whose strategy is more likely to perform worse than expected and why?

Answer 1

P/E ratio is ratio of market price of a stock to it's earning per share, While ROE is net income generated for equity shareholders on the investment over their assets. ROE is a calculation based on book values in books of accounts.

When the historical data included delayed prices instead of real-time prices, ROE of the company is most likely to get affected as it is based on historical datas While P/E ratio is a real time ratio which fluctuates with the share price of the company.

Overall, Len's strategy is more likely to perform worse bcause he uses ROE and it is based on historical data which is delayed so will directly impact his performance.