Question #119 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf

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Shared Context

- Which of the following is the normalized earnings figure for 2x10, which will be calculated by Pedroia using the average return on equity method? A) $2.63. B) $2.72. C) $2.59.

Question

Which of the following errors has Pedroia made in back testing his stock screen?

Answer Choices:

A. His results are subject to survivorship bias

B. His results are likely to suffer from multicollinearity

C. His results are likely to suffer from look ahead bias

Explanation

Pedroia should have assumed that he could purchase the stocks on the day the ratios were published, not the year-end. As a result of this mistake, he is exposed to the potential effects of look-ahead bias.

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