| This research examines whether a Data Envelopment Analysis (DEA) model based on risk-return considerations can identify stocks which are mispriced relative to other stocks in the same industry. The risk variables employed are variables which had previously been found to help explain covariance in security returns. Four industries were considered: Telecom, Telecom Equipment, Hardware, and Computer Software and Services. Each was studied as the year-end dates in 1997, and 1998.;DEA identifies an efficient frontier of those stocks which are efficiently priced relative to the other stocks considered. The Software industry was found to have the lowest level of overall pricing efficiency, and the Telecom industry the highest. Equally-weighted portfolios of the efficiently priced stocks in the Software industry were found to outperform portfolios of inefficiently priced and randomly chosen stocks. Results in the other industries were mixed. |
