Forecast Precision and Portfolio Performance

This paper investigates the connection between the forecast precision of security analysts and the superior performance of portfolios constructed optimally on the basis of their predictions. In particular, we are interested in the threshold of predictive power that makes for a positive economic contribution of security analysts. Results can be viewed as good news for security analysts. A correlation coefficient between forecast and realized abnormal returns as low as 0.032 will render a security analyst valuable. JEL: C110, C150, G110, G140 Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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