PT  - JOURNAL ARTICLE
AU  - Turan G. Bali
AU  - K. Ozgur Demirtas
AU  - Armen Hovakimian
AU  - John J.. Merrick, Jr
TI  - Peer Pressure
AID  - 10.3905/jpm.2006.628409
DP  - 2006 Apr 30
TA  - The Journal of Portfolio Management
PG  - 80--91
VI  - 32
IP  - 3
4099  - https://pm-research.com/content/32/3/80.short
4100  - https://pm-research.com/content/32/3/80.full
AB  - Investment bankers focus on narrow industry-based peer groups for individual stock valuation, and some market-neutral equity hedge fund managers restrict portfolios to be sector-neutral. Despite the academic research that typically ignores industry effects, the evidence is that industry effects matter. Narrow industry-based peer groups improve stock valuation precision for three key valuation ratios. In a sample including the boom and bust period of the late 1990s, contrarian strategies were particularly profitable for Nasdaq-listed stocks. For the full sample of stocks, an industry-neutral strategy is better than an industry-exposed full universe strategy in Sharpe ratio terms over every horizon for each valuation ratio.TOPICS: Accounting and ratio analysis, equity portfolio management, portfolio construction