The Effectiveness Research Of PEG Ratio Adjusted By Risk For Choosing Stocks

By connecting PEG model and CAPM, this study educes r_PEGR, an index which isthe PEG ratio adjusted by risk. This article selects the datas of stocks whose PEG ratio arepositive to analyze the effectiveness of r_PEGR for choosing stocks.This article analyzes the trend ofβ ratio in CAPM and obtains that most of thestocks in sample are mean-reversion or stable. So investors can forecastβ ratio andadjust PEG ratio even if βratio is unfixed.The empirical result indicates that the rate of return of small PEG portfolio is higherthan that of big PEG portfolio and the PEG ratio adjusted by risk is significantly effectivefor3-year investment rather than1-year investment. The reason for the second empiricalresult is mainly that the returns in stock market of China is too fluctuant during a shorttime to reflect the real value of stocks.One of the innovation of this article is that the author derives the relationship of r_gA、r_PEG and r_PEfrom the model of Peter D. Easton. The other is that this study adjusts thePEG ratio by risk after transforming the PEG ratio to the rate of return according to thePEG model. In terms of theory, a stock is undervalued so as valuable if r_PEGR＞r_f wheninvestors use r_PEGRto choose stocks and vice versa.