PREDICTABILITY OF MARKET RETURNS USING BOOK TO

MARKET RATIO

1

Abstract

This particular topic is about predictability of market returns using book to market ratio. This

particular ratio is used to calculate return rate from those indexes listed in the S&P 500 index.

Detail data of the history of S&P 500 index starting from 1926 to 2013 have been collected by

the researcher to find out the return and index prices to find out the fluctuations of prices of the

indexes over these years.

The researcher made a detail review of literature to elaborate the related facts of return from

market. The return from dividend and return from Book to market ratio has been compared to

determine the changes in rate of return from these two variables. The researcher has also

elaborated the various macroeconomic factors that affect the return rates. The macroeconomic

factors and the way how these factors have an impact on the return from the indexed companies.

Relation between Book to market ratio and future returns from these listed companies are also

discussed in the review of the literature.

The researcher has also described the reasons for choosing book to market ratio as the variable of

return from the different indexed companies. The difference in returns from dividend and book

to market ratio is also elaborated. Actually, returns from book to market ratio calculates future

return based on the present market value of shares. The positive and negative side of book to

market ratio is also discussed in this research.

The researcher used research onion to describe the philosophy, design and approach of the

research. In this research, the researcher has used analytical design, deductive approach and post

positivism philosophy.

This research is completely based on secondary data. The researcher gathered the appropriate

and authentic data from different available sources. The researcher used these data in proper way

without any bias and implemented the data where required. These collected data is represented in

tabular and graphical manner and interpreted results based on the findings. The researcher also

analysed the data in the best possible manner. Graphs are prepared for analysing different factors

like profitable and loss making industries and calculations of mean and standard deviation of

these listed industries are made.

2

At the end of this research, the researcher has provided detailed conclusion about the

predictability and applicability of book to market ratio. The conclusions and recommendations

are provided by the researcher as per as the problems present in the usage of Book to market

ratio. The recommendations are provided to bring improvements in certain negative aspects of

book to market ratio. The researchers also described the limitations and the problems faced

during the research work. The researcher has kept scope to carry out research on this particular

subject i.e. prediction of market returns by using book to market ratio in the future.

3

Acknowledgement

I would like to thank my teachers and professors for their tremendous and continuous support to

complete this difficult research job. I am thankful to my research guide for his guidance in this

research. Without the help of my guide, this research would have been difficult to complete. I

would also thank my family members, friends for their unconditional support and motivation.

My friends and family members influenced me a lot to make progress in this difficult research

journey. Without the help and guidance of these people, this research would have remained

impossible.

Thank You

Yours Sincerely

________________

4

Table of ContentsChapter 1: Introduction and background........................................................................................6

1.0 Introduction................................................................................................................................6

1.1 Background of the Research......................................................................................................6

1.2 Rationale of the Research..........................................................................................................7

1.3 Research Aim.............................................................................................................................8

1.4 Research Objectives...................................................................................................................9

1.5 Research Questions....................................................................................................................9

1.6 Research Hypothesis................................................................................................................9

1.7 Significance of the Study...........................................................................................................9

1.8 Structure of the Dissertation....................................................................................................10

1.9 Summary..................................................................................................................................11

Chapter-2 Literature review...........................................................................................................12

2.0 Introduction..............................................................................................................................12

2.1 Previous research works:.........................................................................................................12

2.2 Conceptual framework:...........................................................................................................13

2.3 Relation between market returns and book to market.............................................................13

2.4 Macroeconomic environment affecting stock returns predictability.......................................15

2.5 Fundamentals of Book to Market ratio....................................................................................21

2.6 Relationship between Book -to market ratio and future return...............................................22

2.7 Elaborating the difference between the returns based on Book to Market ratio and Dividend

payment..........................................................................................................................................22

2.8 Reasons for choosing Book to Market ratio............................................................................23

2.9 Positive features of Book to market ratio................................................................................24

2.10 Negative features of book to market ratio.............................................................................25

2.11 Comparison between previous research and existing research work:...................................25

5

2.12 Summary:...............................................................................................................................26

Chapter-3: Research Methodology................................................................................................27

3.0 Introduction..............................................................................................................................27

3.1 Method Outline........................................................................................................................27

3.2 Research Onion........................................................................................................................27

3.3 Research Paradigm/Philosophy...............................................................................................28

3.3.1 Justification for selecting positivism....................................................................................29

3.4 Research Approach..................................................................................................................29

3.4.1 Justifying the use of Inductive approach..............................................................................30

3.5 Research Purpose.....................................................................................................................31

3.5.1. Justification for Analytical Design......................................................................................31

3.6 Research strategy.....................................................................................................................32

3.7 Methods of Data collection......................................................................................................32

3.7.1 Secondary data collection.....................................................................................................32

3.7.2.2 Qualitative Data collection................................................................................................32

3.8 Secondary Data Analysis.........................................................................................................32

3.9 Ethical considerations..............................................................................................................33

3.10 Time schedule considered to perform research (Gantt chart)................................................33

3.11 Summary................................................................................................................................34

Chapter 4: Data analysis and Findings..........................................................................................35

4.1 Introduction..............................................................................................................................35

4.2 Critical evaluation of the issues related to the market returns of the S&P 500 indexes under S

& P 500 indexes.............................................................................................................................35

4.3 Secondary Data Analysis.........................................................................................................55

4.4 Summary..................................................................................................................................56

6

Chapter 5: Conclusion and Recommendation...............................................................................57

5.1 Conclusion...............................................................................................................................57

5.2 Linking objectives with Findings and review of literature......................................................57

5.3 Recommendations....................................................................................................................59

5.4 Limitation of the research........................................................................................................60

5.5 Future scope of the research....................................................................................................61

Reference list.................................................................................................................................62

Appendices:...................................................................................................................................67

Appendix 1: Graph showing the correlation and beta of S&P 500 (1900-2010)..........................67

Appendix 2: Graph showing the credit position of S&P 500 and Hedge funds (1990-2010).......67

7

List of Figures

Figure 1: Dissertation Structure.....................................................................................................14

Figure 2: Conceptual framework...................................................................................................17

Figure 3: Research Onion..............................................................................................................32

Figure 4: Research Philosophy......................................................................................................33

Figure 5: Research Approach........................................................................................................34

Figure 6: Research Design.............................................................................................................35

Figure 7: Graph showing the growth rate of the profitable industries for the last 1 year to present

.......................................................................................................................................................44

Figure 8: Graph showing the growth rate of the profitable industries for the last 1 year to present

.......................................................................................................................................................48

Figure 9: Graph showing the trend of growth and decline of the related industries.....................51

Figure 10: Graph showing the index of S&P 500 index from 1926 to 1966.................................55

Figure 11: Graph showing the index of S&P 500 index from 1968 to 2013.................................58

8

List of Tables

Table 1: Gantt chart.......................................................................................................................38

Table 2: Table showing the growth of the profitable industries of S&P 500 Index......................41

Table 3: Table showing the statistical data of the profitable industries listed in S&P 500...........43

Table 4: Table showing the decline of the loss making industries of S&P 500 Index..................47

Table 5: Table showing the statistical data of the loss making industries listed in S&P 500.......49

Table 6: Table showing the decline of the loss making industries of S&P 500 Index..................53

Table 7: Table showing the statistical data of the loss making industries listed in S&P 500.......55

Table 8: Table showing index, book to market and dividend yield of S&P 500 indexes (1926-

1966)..............................................................................................................................................60

Table 9: Table showing index, book to market and dividend yield of S&P 500 indexes (1926-

1966)..............................................................................................................................................61

Table 10: Table showing index, book to market and dividend yield of S&P 500 indexes (1926-

1966)..............................................................................................................................................67

Table 11: Table showing index, book to market and dividend yield of S&P 500 indexes (1967-

2013)..............................................................................................................................................71

Table 12: Table showing index, book to market and dividend yield of S&P 500 indexes (1967-

2013)..............................................................................................................................................77

9

Chapter 1: Introduction and background

1.0 Introduction

According to the statement of Basu (2008), the market returns can be defined as the return in the

capital investment in terms of stock market. Market return can be return from trading or can be

dividends provided by a company at regular basis to its shareholders or the market holders out of

the profits earned by the company in the particular part of a year. Market returns can be

evaluated through the dividends provided by any certain firm or company in every quarter of the

year in which the company making the profits usually shares a certain portion to the market

shareholders to gain more profit as a return (Barber and Lyon, 2010). These are never fixed and

are very dependent on the market and its current values. The market return changes from

holders-to-holders of the market investors depending on the market risks that further depend on

the market analysis.

The book-to-market ratio is the ratio, which can be evaluated to compare the book value of a

company or a firm by comparing its return value with the current market value. By doing this,

the company can have an idea of its stock value in the market. This research will evaluate that

stock market value and returns by comparing it with the current scenario in the USA Stock

Market. Jiang and Lee (2007) opined This research is based on the predictability of the market

returns using book to market ratio that is frequently used by the investors of those companies

listed in S&P 500 index. This ratio helps to find out how much return a particular index can

provide to the investors in future in contrast of the present index price.

1.1 Background of the Research

According to the finds of Basu (2008), the Predictability of a stock market is evaluated by the

future stock prices using various statistical tools, charts and focusing on price movements.

Return profitability is also dependent on the pattern of investment made by the investors and the

capacity to take make investment in those shares bearing high risks. According to Darner (2008),

market returns are highly dependable on the market risks, which could be positive or negative as

a return. Nowadays, there are some derivative instruments that are used to maintain a graph,

10

related to the up down of a market ratio in a regular basis. These instruments help the investors

in hedging which informs the company about the reduced risks associated with the market.

According to Jiang and Lee (2007), Different corporate sector companies are using these tools in

order to gauge their stock market values and to evaluate the ratio by using the book-to- market

ratio so that the company can have a predictability of the market returns. This particular topic is

chosen by the researcher to find out the reason why calculations of returns using Book to market

ratio failed in recent times. Alaska (2010) opined book to market ratios have provided nearly

exact results regarding the return, but since the major crisis in the stock market, the predictions

have turned negative.

1.2 Rationale of the Research

What is the research issue?

The issue in this research is about the positivity and acceptability of Book to market ratio

regarding return predictions. Fama and French (2015) sated returns from companies listed in

S&P 500 have changed at present. Previously, this ratio used to make nearly accurate predictions

but in recent times, majority of these predictions have turned out to be negative. The high stock

return issues of a certain corporate firm trigger the equity issues in the stock market that are

mainly driven by the consideration of the market timings. The issues are regarding equity shares

of the companies listed in S&P 500 index. According to Griffin and Lemmon (2009), returns are

flexible in case of equity shares and that has created the problem regarding return after the

recession. It mainly arises when there is an issue in stock markets through various accessibilities

to the capitals and the investors based on the gains that the company would avail in the future

market. The equity problem generates the legitimate certainty about the survival of the current

economic system of a certain corporate company. This problem strongly responds to the spikes

of the corporate sector holdings, which will significant to the relation of the existing share or

market holders.

Why is it an issue?

It is an issue for the certain company, which is facing the equity problem because the company

relatively gives the compensation for the higher rates to the market equity. This makes an

organization far less guaranteed which, in worse, results in the downturns. Lam (2009) stated

11

that companies unable to operate without investment have to shut down its operations fearing

losses. If proper returns are not received, investors also prefer to stay out from making

investments. A risk free market generate the trust and bonding of the company in future for a

long term basis as because of the low chances of downturn in the income of the company that

follows a certain pattern in the return of the market stock prices. Suppose the market return of a

company is 15% for a certain year and the risk free rate over that particular period of time is 6

% , then, the equity risk will be 9% for that in that year.

Why is it an issue now?

It is an issue now because as per the equity risk premiums in the market, a company can certainly

understand the existence of a company in the future market. Thus, it puts the company to invest

in high risk to cover up the compensations, which is to be given to the market holders for the

loss. Thus, the equity problem is an alarming issue for the company because it can be a profit for

some firm by giving high stock returns. Lau et al. (2009) stated in addition, in few firms, it can

be a huge loss where the firm needs to cover up compensations, which takes place with the issue

in the market.

What could this research shed light on?

This research sheds lights on predictability of stock market returns in comparison to the current

market scenarios of the USA stock market. Using Book to market ratio and the issues and

challenges any corporate firm listed in S&P 500 faces related to the stock returns are easily

understood. The researcher has taken the help of secondary research to understand the challenges

and issues that any investing firm faces from the different market returns by providing certain

recommendations and suggestions in order to resolve the challenges.

The purpose of this research is to find out predictability of market returns and its effectiveness

and acceptability among the investors. Book to market ratio has lost its effectiveness regarding

prediction of positive returns.

1.3 Research Aim

The aim of the research is to find out the predictability issues of the market returns by using the

book to market ratio in which the return defines the amount, which is received by market holders

12

as a return of their capital investments in terms of profit or loss. It is the return, which is

generated by stockholders or the market holders out of the market. It is to evaluate the empirical

results, which are consistent with the market capitals in an efficient way.

1.4 Research Objectives

The researcher is going to conduct the study in order to meet the following objectives:

To critically evaluate the issues related to the market returns of the different firms in

related to the industry in context to the market value.

To suggest the suitable recommendations to the firms to solve the related issues related

to the ratios of the market value

1.5 Research Questions

The researcher looks after the following list of Research Questions:

How efficiently the does the predictability of the market returns has an impact to the

certain firms for boosting up the market ratio?

What are the issues related to the market returns of the firms while using the book to the

market ratio?

1.6 Research Hypothesis

H0: Market ratio is important for the predictability of the market returns

H1: Market ratio is not important for the predictability of the market returns.

1.7 Significance of the Study

The study, which has been done by the researcher gives the importance of the market, returns in

terms of the market ratios in the stock market analysis. The market returns provides the company

about its existence in the future and the company gets an idea about the next investments.

Investments are done by calculating the current market values by using the book to market ratio.

In fact, the company year turn over depends on the stock market returns as because of the equity

market, which gives the company a profitable return or at times, the loss. Therefore, the stock

13

market returns is a calculation chart, which helps the company to maintain its business with the

market values and returns. This entire research can be helpful for the learners in future those,

who are willing to further carry out this research. The issues that have been determined by the

researcher and the recommendations suggested according to the issues will help the corporate

companies to resolve the problems faced in the USA market. These suggestions if followed can

give the companies a better future.

1.8 Structure of the Dissertation

Figure 1: Dissertation Structure

(Source: As created by author)

14

1.9 Summary

The entire chapter focuses on the creating the backbone of the study which is based on the given

topic, which is, determine by the rationale taken for the research. The dissertation has been

conducted based on the research points. The entire dissertation gives a clear objective based on

which the researcher works accordingly. The researcher further looks after the objective and

questions of the research, which can be further taken by the certain corporate companies to

resolve its existing issues. The body of the dissertation is clearly described by the structure of the

dissertation drawn above by the researcher, which is elaborated in the next coming chapters. By

taking the reference of the market ratios and market values of few corporate sector companies,

the research has been done to evaluate the predictability of the market returns.

15

Chapter-2 Literature review

2.0 Introduction

The term literature review is the entire representation of the subject on which a research is to be

carried out. Review of the literature needs to be inclusive of the present knowledge of the

analysis of findings along with proper uses of the related methodology. This particular research

is about the predictability of the market returns using book to market ratio. For making a proper

review and completing the entire research in the most effective manner, the researcher has

identified the related theories and carried out proper analysis on these theories and models. It is

necessary to posses usual knowledge about means of return from stocks have been used and the

application of book to market ratio to make a prediction about the return.

The entire research is about the prediction of return provided by the companies by using book to

market ratio. The usage of Book to market ratio is one of the major means of calculation of

returns received from the shares listed in the S&P 500 index. Yau (2012) stated in USA, the

usage of Book to market ratio is one of the mostly used return predictability calculation done by

investors for S&P 500 index.

2.1 Previous research works:

Previously research on this particular topic has been carried out and those researchers made

analysis of the present data and the theories. As per the views of Walford (2008), researchers

have explained how rate of returns have differentiated with prior difference in the level of risks

involved. The inclusion of the different types of pricing models was also included regarding

finding out the returns. Kellermann et al. (2013) opined that book to market ratio have the

prospective of identifying the portfolios having capacity to produce higher rate of return.

Alongside, this calculation has also produced negative results in some cases. Previous researches

have tried to explain the effect of available market risk changing the returns in future.

16

Macroeconomic environment affecting stock returns predictability

Detail analysis of the macroeconomic factors that changes rate of return

Fundamentals of Book to Market ratio

Relationship between Book -to market ratio and future return

Relation between market returns and book to market

2.2 Conceptual framework

Figure 2: Conceptual framework

(Source: As created by Author)

2.3 Relation between market returns and book to market

Returns generated by the investors in the stock market are call as market returns. Return can be

in the form of profit through trading or in form of dividends given by company to the

shareholders. Market returns are not fixed and are subject of market risks (Yau, 2012). The term

market return is defined as the rate of the return that is going to be earned in the course of the

entire investment that has been made in favor of the company. The rate of the return has been

collected and counted for the span of the years like 5 or more. According to Nguyen and

17

Schuessler (2014), investors generally find out the rate of return for a long period of time. The

reason behind doing so is to find out the financial stability of the company for the last few years.

There are different types of the return like the average return; it is the return that the company

has provided for the period of the last 3 to 5 years. Parigi et al. (2013) discussed it helps to find

out the status of the profitability or the loss that the company has been incurring in the following

years. The other type of return is the index performance return where the price of the bonds

issued by the companies is taken into account during the different parts of the year. Here, the

quarterly performance rate is taken into account. According to Gulen et al. (2011), the other type

of return that is available in market for the investors is the historical return. In this type of return,

the rate of the return that has been provided by the particular share for a long period of time is

taken into consideration. By dividing the year in to 3 parts the rate of the return provided in the

3rd, 6th and the 12th month is generally taken into account. Liew and Vassalou (2009) noticed rate

of return for every company is listed in the stock index. The price of the share is calculated on

the basis of the price of the share per $100. In this particular method, the rate of the return is

measured in the terms of the T-Bills, Stock Bills are taken into account, and the entire rise and

the fall of the share prices are found and are published in the share option market.

Book to market is the ratio that is calculated by the firms and the investors to find out the market

value of the shares in the current or the upcoming years. As per the views of Nguyen and

Schuessler (2014) while making the calculation of the book to market ratio, the value of the

shares of the company is taken into account. The method of finding the entire value of the shares

is done through the process of capitalization. For this purpose, the market and the book value of

the firm is taken in to account. Edwards et al. (2013) described factors like the market returns

and the book to market has a close relationship as both the factors have the common connection

of depicting the return that the particular bond is going to deliver. According to Somekh and

Lewin (2011), the general concept of the factors is to provide the return rate, so that the company

is able to make the prediction in relation to the return that the company is going to get and the

future of the investments that the company might have or make the loss in respect to the present

year. Parigi et al. (2013) stated from these calculations, the stakeholders of the company will be

aware of the position of the company in terms of the financial condition and the shareholders of

the company will be able to predict the return on the invested money.

18

2.4 Macroeconomic environment affecting stock returns predictability

According to Yau (2012), macroeconomic environment factors which affect stock return

predictability are like inflation, money stocks, aggregate output, interest rates, and ratio of

consumption to wealth and unemployment rate. As per the views of Alaska (2010), each and

every economy is build up with the twin factors of Micro and macro economics. The micro

economics is oriented towards the benefits and the limitations that the individual or the working

bodies like the private and the public concerns. Piotroski (2007) noticed that macroeconomic

factors of the economy is driven towards the return of the stock and the benefits and the

problems that the shareholders are about to receive in the following years. Darner (2008) opined

macroeconomic factor of the economy is inclusive of the key factors like discrimination of

product prices, conditions of different markets, and rate of investments and amount of savings

that the company is going to receive is considered to be the factors that have the potential to

affect the rate of the return in the favor or against the company along with the considerations of

the other market influencing factors.

As per the views of Harrison et al. (2011), various macroeconomic factors that play an important

role in regarding the rate of the returns from the investment are the rate of unemployed people,

fluctuating rate of the interest output of the different types of materials that has been produced in

the entire economy during the particular financial year and the rate of blockage stocks in the

economy along with rate of confidence of buyers across the economy regarding the performance

and usage of particular type of products. Onwuegbuzie and Leech (2009) opined different factors

and role of factors regarding rate of returns of various stocks are discussed as follows:

Rate of Unemployment- Unemployment rate of a country determines the strength of the entire

country regarding the financial and the profit earning status of the economy. Truscott et al.

(2010) noticed huge rate of the unemployment count states that the economy is rather weak in

terms of the performance especially in the sector of the economic development and also states

that the internal strength of the economy is poor regarding the criteria of creating opportunities.

According to Yau (2012), high employment demonstrates that the internal functioning and the

progress of the business cycle are favorable in all aspects.

Fluctuating rate of interest- The higher rate of interest demonstrates that the economy has been

in the downward side in terms of the performance. According to the views of Vargas-Hernajndez

19

(2012), lower rate of interest means that the economy has been able to recover all the debts and

no more further debts are to be made by the country to meet all the internal financial affairs.

When the rate of the interest is higher it demonstrates that the economy has got shortage of the

liquid money to meet the obligations.

Production- As stated by Walford (2008), production of different types of materials in the

particular year. In general, the production or the rate of the output depends on the factors like

demand of the products, and the diverted rate of the returns and the factor of income

determination and when the investors are willing to receive the nominal earning for the purpose

of making loss in the course of the investment.

Detail analysis of the macroeconomic factors that changes rate of return

Inflation: Inflation is defined in economics as an increase in the pricing level of goods and

services for a certain period of time. The relation between return and inflation is one of the most

debatable issues in academy. Available information regarding the future values of inflation is

shown on the nominal rate (Cenesizoglu, 2011). As there is a strong connection between

common stock return and inflation, it can be used to predict the future. There are several reasons

for the occurrence of inflation in the economy. Inflation is termed as the phenomenon, where

prices of the goods produced and sold within the limits of a country increases. As per the views

of Parigi et al. (2013), Inflation can also take place when, usage of money becomes lower than

the rate of the existing amount of money and supply of money to people of a particular country.

In case of increase in the level of the price, the buying power of the currency gets lower than

before. Piotroski (2007) opined that Inflation is harmful for a country and also to the residents.

The situation when people are unable to consume goods with a certain percentage of money, it

indicates that the value of that currency has fallen.

Inflation makes the situation worse regarding making investments. Actually, when the value of a

currency falls, the investment will bring less return in context of the amount of money invested.

The rate of return can vary up to a large extent due to inflationary factors. According to Adam

and Goyal, (2008), economic experts, the main reason of inflation is due to higher rate of unused

liquid money in the entire country. Barber and Lyon (2010) noticed in this situation, the price

chart of all the materials keeps increasing and the capability of the buyers to buy a particular

20

product keeps falling. In economic terms, there are two types of inflation- demand push and cost

push. Though inflation is harmful for an economy, there are few ways to control inflation. The

ways to fight inflation are-

Controlling the rate of free supply of money

Controlling prices of materials having high demands

Keeping the payments of the workers in different sectors unchanged

Government initiatives like increasing tax rate and interest rate to stop the rate of demand

(Amit and Livnat, 2008).

Money stocks: The relationship between common stock and money has got a considerable

attention for a long period of time (Menzly and Ozbas, 2010). The increment in money supply

tends to increase the common stock price. Cenesizoglu (2011) indicated that money stock has

explicit power. Money stock has both in-simple power and out-of-simple predictive power in

different countries. The term money stock means availability of assets in an economy during a

specific period. The relation between the stock of money and rate of inflation is quite interrelated.

As per the views of Dennis et al. (2009), in cases, when the rate of money supply is higher, the

price becomes higher due to minimum usage of money for purchasing any product. To ensure

that an economy is not affected by inflation, the central banking institutions must check the

supply of money. As money is used to purchase the majority of items available, the other

mediums of purchase (like costly metals) are not considered for causing inflation.

Curcio et al. (2003) opined that major impact in the price level of all commodities sold is caused

by money supply in that economy. Not only liquid or usable money, the amount of money saved

in bank accounts are also regarded as money supply. The rate or amount of money supply is

decided by FRP (Federal Reserve Policy) in USA. Lam (2009) opined these different types of

money are described as M0, M1 depending on the pattern of the money hold. Another term used

frequently regarding the convertibility of the currencies is “Narrow Currency”- these can be

transferred in to cash at any moment as per need of users and account holders. When supply of

money is less, people borrow money by paying higher rates of interest and thus people keep

away from investing. According to Nguyen and Schuessler (2014), less amount of investment

will make companies to stay away from investing and thus the rate of operation of the companies

become lower and the return to the investors are also less.

21

Aggregate output: There are two types of approach which try to explain the relationship

between returns and aggregate output. According to Yau (2012) first explanation evaluated that

common stock returns and output are related through maturity premium. The second explanation

is based on two theoretical models. They are mean of reverting output and life-cycle payment

income hypothesis. Piotroski (2007) stated the definition of the term aggregate output is the net

quantity of the materials produced and is ready to be supplied in the hands of people for usage.

When particular products are ready to be used by the people, and demand for those products are

high, it makes an indication that the economy is all set to be enjoying a positive growth factor.

According to Cameron (2009), in normal economic sense, when the rate of goods produced in an

economy during a particular period of time is higher, it can be said that the country is showing

all the signs of better performance. When the factor of GDP is taken into consideration, the

market price of the products is taken into consideration. As per the statement of Menzly and

Ozbas (2010), when a product is manufactured and sold inside the boundary of the country, the

services provided by the residents of the country is measured and at the same time, destruction

caused in the natural resources of the country is also taken as a harmful factor. Zhang (2013)

opined total output, which is also termed as aggregate output is defined as the total amount of the

goods produced without destroying the valuable resources of the economy or the country.

Interest rates: There are two important research investigation related to the relationship between

interest rates and returns on common stocks. First takes interest rate as good proxy for the

expected inflation and use them to analyze the relation between returns and inflation. Second

investigation reveals that variation in stock is tracked by a default premium variable and a term

premium variable, which are formed from interest rates. Walford (2008) stated that interest, is a

common term used in the section of lending or borrowing money from different sources like

financial institutes or from non financial bodies. The term interest means that additional amount

of money that the borrower needs to pay to the lending body (financial and non- financial

institutions and even to person) in addition to the principle sum.

According to the views of Kang et al. (2010), rate of interest depends on the condition of an

economy. When the economy is in better financial state, the rate of the interest is generally

lower. It signifies that the flow of money or the availability of money is adequate in the hands of

the people. When people have adequate money in hands, normally the rate of borrowing is less.

22

This indicates a healthy economy. Cenesizoglu noticed (2011) when people have less amount of

money in hand or is unable to make use of money, people becomes prone to borrow money to

meet demands. In this type of situation, the lending institutions also charges higher rate of

interest. Piotroski (2007) stated that banks charge higher rates of interest when the economy is in

shattering condition and is running out of money. In situations of economic downswing, the rate

of the interests is quite higher and the well developed economies always maintain a check in the

rate of interest for controlling the inflation rate.

In case of increasing the rate of investment in the economy, the rate of interest is lowered by the

banks (central Banks) of the country to attract people towards making investment. According to

Kellermann et al. (2013), fluctuation of rate of interest in an economy especially in

macroeconomic factors of the country, it can create a situation, where the price of the shares can

get raised by high amount. Excessive rate of credit can also increase share prices.

Ratio of consumption to wealth: Aggregate consumption, asset holdings, and labor are

interconnected. They may deviate from each other for short periods and they can be used to

predict stock market variations for a short period of time (Cenesizoglu, 2011). In economical

context, the consumption of wealth is confined to the amount of the asset held during the

particular year. This ratio is used to measure the rate or amount of return that owner of these

wealth is going to get from these wealth. According to Jiang and Lee (2007), the wealth

possessed by human is not confined to the wealth, generally termed as fixed assets like building,

land or any valuable or costly metals like gold, silver etc. The assets are also in the forms of

different securities or bonds issued by the government or the different investment tools like the

commercial papers. Fama and French (2015) opined it is seen that the rate of the expenses made

by people is higher when the wealth in hold is higher. When the discussion is about the wealth

consumption by human, there are two types of wealth, persisting in the frame of the human

wealth. These two types of wealth are financial wealth and the wealth related to housing.

According to the studies of Basu (2008), people of USA are prone to increase expenditure in

accordance to the increase of wealth consumption.

When the wealth consumption ratio is considered in case of making investment in share market,

it is concluded that people having more wealth in hand do have the opportunity to increase the

rate of investment. Curcio et al. (2003) opined in actuality, the rate of the investment is

23

dependent on the capacity of the investors. When the investors have the capacity as well as

financial power to invest, these people have the capacity to bear the involved risk of the market,

investment rate increase at a higher rate.

Unemployment rate: Employment rate, unemployment rate, work hours, and hourly earnings

affect the stock marketing enormously. Zhang (2013) indicates that there is a statistical

significant relationship between unemployment and returns. The level of employed and

unemployed people is a factor that makes the rate of the investment higher and lower. In

countries where the rate of employment is higher, it suggests strength of the economy.

According to Dennis et al. (2009), it is found, that if the rate of unemployed people is more in an

economy, it suggests that the economy is not progressing. Rather it demonstrates that the

economy have some problems in the financial and the operational structure. According to the

investors, the economy that has huge rate of unemployed people suggests weaker economic

situations and signifies that full utilization of the resources especially human factors have been

lower than usual. According to Barber and Lyon (2010), unemployment and economic recession

has a common link. In most of the situations it has been observed that countries that are affected

by recession have not been able to employ more people and the generation of working

environment is lower. When there is a higher rate of unemployment or companies indulged in

leaving out more workers, it suggests that unfavorable condition of the economy is showcases

and it is totally non advisable to invest in this scenario.

As per the views of Penman et al. (2009), for last few decades, it has been noticed that due to

unemployment the share prices have fallen. The rate of the investment declined as the investors

found the economy unfit to make investment. In case of S&P 500 index it was seen that rate of

the investment was affected during the periods of low rate of unemployment. During this type of

economic conditions, the investors choose not to invest due to the fear of getting minimum return

as the price of the shares keep on rising. According to Piotroski (2007), during this type of

situations, the investors and the share market holders are unable to realize the factors that would

uplift the economy and prefer not to take any risk regarding investing in the companies. In this

type of situations, the risk factor becomes high and the preference of shareholders are mainly on

the shares that has lesser risk but are going to yield less profits. Lau et al. (2009) argued that less

risky bonds are preferred due to the factor that the investors do not face the situation of making

24

losses and do not get adequate return as well as losing the principle amount of the invested

money.

According to Griffin and Lemmon (2009), after making a brief and detailed study of these

macroeconomic factors that changes the rate of the interest of the investments made in favor of

the companies. These macroeconomic factors do play an important part in determining the rate

of the interest and rather to say specifically rate of returns from investments. So, before making

any investment, investors make a close study of these macroeconomic factors and then take the

decision regarding making investment. Lau et al. (2009) opined when Book to market ratio is

considered by investors regarding return, it is observed that most of the times have the results are

in negative values. It states that maximum number of negative returns from S&P 500 index over

the last few years have resulted in decreased number of investments. Actually Book to market

ratio is about calculating the rate of return in future from a particular index after comparing the

present book value of the index.

2.5 Fundamentals of Book to Market ratio

In USA, the book to market ratio is considered as one the mostly used and better consideration

factor of the book to market ratio. Piotroski (2007) argued that choice of investing depends on

book to market ratio of the different industries listed in the S&P 500 index. The rate of book to

market ratio is considered as an important parameter before investing. The companies having

higher book to market ratio, is considered to be inexpensive for investing.

According to Avery et al. (2011), while making an investment, the first and foremost criteria

checked by investors are return rate and the level of profitability that a particular index is going

to fetch in future. The main contrast is made between the present price of the index and what the

price will be after a certain period of time. Before investing, the investors always check the

category of the indexes. The stocks having higher rate of growth in the recent years, is mostly

preferred by the investors. Walford (2008) noticed that measurement and prediction of risks

involved in the stocks are also considered by analyzing the book to market ratio.

It has been observed that the indexes with low Book to market ratio provide higher rate of return.

The factor of risk is also considered while calculating the book to market ratio. Actually, it has

been observed that the indexes having maximum risks are generally confined towards generating

25

higher rate of return, and can also incur loss in a very less time. As stated by Jiang (2009), risk

factor is also one of the important factors considered by the investors while making an

investment. The main performing criteria regarding the calculation of the change and swing in

the price of the shares are depicted by calculating the Book to market ratio.

2.6 Relationship between Book -to market ratio and future return

The rate of the future generation of return and the Book to market ratio is positively related with

each other. According to Truscott et al. (2010), price of stocks are also indicated and fixed by

taking a look at the book to market ratio. When figure of book to market ratio is low, it states that

share prices will be comprehensively higher. It is just the opposite when book to market ratio is

high and the price of the shares are comparatively lower.

According to Walford (2008), apart from book to market ratio, return rate is also dependent on

the factor of the earning and the profit earned by the company during the operations in that

particular financial year. The companies listed in the S&P 500 index are also rated by different

rating agencies. According to the views of Zhang (2013), the ratings of the companies listed in

the index, and considering the Book to the market ratio of the listed securities, the investors take

decision regarding making an investment in the specific industries. Yau (2012) demonstrated in

recent times, the industries like Information Technology, energy, and the petroleum industries

are the leading player of the S&P 500 index. Returns have been higher of these industries due to

the major success regarding earning of profit. Darner (2008) argued that these stocks are

generating higher returns since the last five years and positive predictions regarding continuation

of the present rate of return has been made for these industries.

2.7 Elaborating the difference between the returns based on Book to Market ratio and

Dividend payment

In general, the investors are to receive the return from the investments made in favor of

companies. The companies also provide returns to the stakeholders out of the profits earned. This

excess return provided out of profit is termed as dividend. Book to market ratio is also the

parameter to find out the return amount but in a different way. According to the words of

26

Onwuegbuzie et al. (2009), book to market ratio is used to find out the returns from the indexed

shares comparing to the present value of the index at present.

The rate of return when calculated by using Book to market ratio and dividend payout ratio will

generate separate return value. The dividend is paid when a stakeholder invests in a company

directly or provides financial assistance. As per the views of Walford (2008), book to market

ratio is calculated when investment is made through the stock exchanges in which the shares are

listed. When the capacity of finding out or prediction of returns is made by using book to market

ratio, the results are quite effective and nearly correct. As argued by Kang et al. (2010), it has

been also observed that negative return predictions too have come using this particular tool.

When book to market value is considered, the results are achieved by finding out the expenses

that are to be made by the company in the future years. Actually, the rate of profit from those

investments (cash flows) is calculated by making predictions. The index will be termed as

profitable or positive return is indicated, when those future cash flows are going to generate

profit for the company. According to Harrison et al. (2011), level of positive cash flow can be

transformed into negative data finding if the future cash flows are not made and the companies

start paying discounts and make delay in making the utilization of the cash flow.

2.8 Reasons for choosing Book to Market ratio

In some cases, return rates are predictable. Dividend payout rate is sometimes known to the

investors. Avery et al. (2011) opined the reason for knowing the return rates is due to pre

declaration of dividend amount by the companies to its shareholders. But in USA, the use of

book to market ratio for determining future returns came into use since late 60’s.

While measuring the return using book to market ratio the index returns are tallied with the

changing returns when measured with the fluctuation of time series analysis. Lam (2009) stated,

it is well known to the investors that return rate will increase if the price of the shares increases

over a period of time. With the help of book to market ratio, investors can predict one year based

returns. The indexes having same weighted value, are compared based on the dividend yield and

book to market ratio. So starting from the year 1926 till 2013 it can be seen that return rate from

these two return demonstrators are different in all aspects for same weighted indexes.

27

According to Gulen et al. (2011), if the return for these entire years is estimated, then it can be

observed that returns have fluctuated a lot in these years due to market volatility and presence of

risk factor. The reasons for choosing this variable Book to market ratio to determine market

returns of the stocks having variation in all its cross sections. The return rate is calculated by

finding out the expected amount of cash flows of the listed companies. The relationship between

future return and book to market ratio is usually positive in most of the times.

Harrison et al. (2011) argued, even the coefficient between book to market ratio results and

dividend yield is positive is majority of the cases starting from 1926 to 2013. The return using

book to market ratio is determined by dividing the possible expenditures of the indexes by

present value of the index.

2.9 Positive features of Book to market ratio

The term book value is demonstrated by the difference in the value of the assets and the total

remaining payouts. As argued by Alaska (2010), it is a common fact that securities with lesser

risk are mostly preferred by the investors. The reason behind this preference is because of less

chances of earning profits in short time. People interested to make investments for a longer

period prefer to invest in the less risky bonds. Lam (2009) opined when investors receive higher

rate of returns, they become interested in purchasing riskier bonds in order to earn profit.

The positive features of Book to market ratio are discussed in brief-

Future estimation of return rates that proved to be positive in many cases.

Predicting the position of the economy as well as the index.

Helps the investors regarding making investments in particular industry or company

listed in S&P 500 index.

Help to know past records regarding rise and fall of particular indexes in the particular

index S&P 500 (Avery et al. 2011).

Fama et al.(2010) opined though several positive factors are present in calculation of Book to

market ratio, there are several other difficulties or limitations present that has always questioned

the acceptability and accuracy of this ratio to predict future returns from S&P 500 index.

28

2.10 Negative features of book to market ratio

Gulen et al. (2011) opined all predictability ratios are comprised of different negative aspects.

All ratios are calculated to find out positive and negative features of all market results. Ratio

analysis helps to take precautionary measures regarding any persisting risks in return portfolio.

In case of persisting economical issues and frequent downswings in share prices, the results

derived previously from calculation of market ratios can change up to a large extent. Liew (2009)

argued that these ratios are only precautionary objectives regarding taking protection from loss

making in the share market. The negative features of Book to market ratio are as follows:

Huge differences in returns noticed as per as the calculations done using Book to market

ratio.

Non acceptability of Book to market returns for a long time by investors.

No predictions were separately given by Book to market ratio before the huge market

crash in 2008 (Cameron, 2009).

Most of the industries listed in S&P 500 have failed to perform as per the predictions of

Book to market ratio (Penman et al. 2009).

2.11 Comparison between previous research and existing research work:

The previous researches on this particular topic, predictability of market returns using book to

market ratio have described all the positive features as well as the negative features of this

predictability calculation. Calculation is carried out by collecting all the prices of stocks. The

previous researches have failed to discuss the positive and the negative features of the book to

market ratio, and how much difference is there in case of returns from dividends and book to

market ratio. In the past researches, the researcher tried to elaborate the relationship between

book to market ratio and changes in returns. Alaska (2010) noticed that relationship has been

stated clearly and in this research, the relationship has been clearly stated. The related researches

were carried on based on the stock prices of companies listed in S&P 500 index. Returns were

calculated for future based on the stock prices of those years when researches were carried out.

In this research, the researcher opted to use rate of the stocks listed in S&P 500, starting from

1926 till 2013. The returns are predicted and showcased in terms of monthly, half yearly and

annual returns.

29

2.12 Summary:

The summarization part of the literature review states how the researcher has taken up all the

relevant data and information useful in this research and applied in the course of the research.

Researcher added all relevant and required information and records of returns availed from S&P

500 index. All factors affecting return rate along with the macroeconomic factors affecting

returns are discussed and aligned with the research topic. It clearly shows that, share prices do

not increase only because of increase in the level of profit but also on certain economic factors of

the country and different policies adopted by the government related to financial adjustments and

adopting and abolishing preexisting or most preferred policies regarding financial strength of the

country. The share prices are also subjected to fall or rise in respective of various decisions

regarding operational ways in future.

30

Chapter-3: Research Methodology

3.0 Introduction

According to Bryman and Bell (2011), research methodology is one of the most important

aspects of any research work. In the research related to the predictability of market returns using

book to the market ratio researcher used appropriate strategy or methodology to complete

research by analyzing several methods of research strategy. Brannen (2009) stated proper

assessment of research methodology helps to solve problems related to the research work. The

research paradigm or philosophy, data findings and investigations help to find out the result of

the research problems (Onwuegbuzie and Leech, 2009).

3.1 Method Outline

This particular research is based on secondary data. For this research, researcher has collected

relevant data from reliable secondary sources like newspaper, journals, magazines, work of the

past researchers. The most appropriate and authentic data is available on the website of the S&P

500 index. Secondary data is analyzed by using post positivism research philosophy, inductive

approach and exploratory research design. The shares listed in this above mentioned index is also

available in the website of stock exchanges. The usage of the most authenticated data or this

research has led the way towards usage of secondary data in this particular research.

3.2 Research Onion

For any research, research onion is the simplest strategy to understand research methodology

that helped to conduct the research. The research steps are evaluated in such a way that one step

could be understood by opening previous steps. Just like research onion has many layers,

similarly in research work one step is revealed by opening another layer. There are many layers

or methods related to research work. By opening the layers the researcher could understand

appropriate method for each research. There are several layers of research onion like research

philosophy, research approaches, research strategies, choices, time horizons and last one is data

collection core. The diagram below shows the research onion in details about the methodology

used in this research.

31

Figure 3: Research Onion

(Source: Saunders et al. 2009, pp.52)

3.3 Research Paradigm/Philosophy

The research philosophy is first layer or process to evaluate the research results or outcomes of

research. The research philosophy comes with view point of researcher and with knowledge of

the researcher. According to Brannen (2009), research philosophy also needs experience and

technical knowledge of the researcher by working with the method. There are various types of

research philosophies like positivism, realism; interpretivism (Vargas-Hernajndez, 2012).The

epistemology approach of philosophy interacts with the relevant data in the field of education,

while ontology deals with characters of reality and axiology deals with judgmental approaches of

education. Bryman (2006) discussed that first philosophy related with the scientific approaches,

second one related with the truth and third one is related with emotional attitude of the

researcher. The positive philosophy of this research has been further divided and progressed

towards post positivism factor.

32

Figure 4: Research Philosophy

(Source: Darner, 2008, pp.90)

3.3.1 Justification for selecting positivism

The positivism research paradigm is related with emotional aspects related to scientific methods

used for the research work. During study of positivism, a research topic is studied and researcher

function is bounded in logical and analytical view approach. The details of data collected by

researcher are proven and identifiable. The statistical study is done by researcher with the help of

collected data. In the above mentioned topic positivism is taken as research paradigm.

3.4 Research Approach

Harrison and Reilly (2011) mentioned that research subjects and objectives help to determine

appropriate research approach that could be used for the research work. There are two types of

distribution methods for research approach. They are Inductive method and Deductive method of

research approaches. The deductive approach is related with testing theory, and it is most used

research approach which conducted deduction of hypothesis, search hypothesis and modify

theories as required in research. Inductive approach is related to generalization that is followed

33

Research PhilosophyPOST POSITIVISMREALISMINTERPRETIVISMPRAGMATISM

by theories developed for the research (Truscott et al. 2010) Deductive research approach is

preferred for this research work as it has more particular working process.

Figure 5: Research Approach

(Source: Alaska, 2010, pp.34)

3.4.1 Justifying the use of Inductive approach

This entire research is carried on the basis of the secondary data, and then the researcher has to

carry out the entire research process with the data that has been used by some previous

researchers or also from the respective websites or the reports that has been published by the

authentic bodies and even from the company.

The main motive for using the inductive approach is due to the no usability of the exact data as

the matters published in all related journals, magazines, and websites are not up to date. And as

these data is all about price of S&P 500 indexes, there is a change in the price of the shares

change every day. Also due to the usage of the quantitative process of the research, inductive

approach is necessary.

34

Inductive approach for research Deductive approach for research

3.5 Research Purpose

As described by the research onion there are three different types research design. They are

Explanatory, Exploratory and Descriptive design. Explanatory design is related to theories that

are believed in research. So it does able to reveal the reality of the topic of research. Descriptive

research design evaluates the research work and gives the description about the research topic.

The investigative research design helps to understand primary research and theoretical

information related to the objectives (Walford, 2008).

Figure 6: Research Design

(Source: Darner, 2008, pp.78)

3.5.1. Justification for Analytical Design

In this research work research study, issues and objectives are explained. So, analytical design is

preferred for this research work. Various methods and objectives are collected from data analysis

and explained with the help of analytical design. The data which are collected with the help of

explanatory and exploratory are not find appropriate enough to able to provide required

information about the research work.

35

3.6 Research strategy

As mentioned by Darner (2008) with the help of suitable research strategies a researcher can

optimize the available research policies. Experiments, case studies, interviews, and surveys are

the research strategies which provide the secondary information to the researcher about the

event.

3.7 Methods of Data collection

In introduction method of research data collection method is utilized to achieve the desired

result. The data collected are used to analyze the components of the topic of research and support

the research work. The data gathering methods with detail analysis is given below.

3.7.1 Secondary data collection

According to Magilvy and Thomas (2009), secondary data collection methods include group of

suitable data which is emerged with the help of journals, book, articles and literatures related

with the research topic. Literature resources related to research is collected from various origins

and organizations to get desired secondary data and make appropriate analysis to create results

and conclusions.

3.7.2.2 Qualitative Data collection

Qualitative data is related with the studies and analysis of attitude, thinking, knowledge and

experience (Darner, 2008). In qualitative data collection method data are analyzed and recorded

for the further use like findings and clear out conclusions. As the researcher has opted to carry

out the secondary research, the data has been used from the reliable sources like the web

published materials, journals, magazine articles. The researcher has to option to use the research

findings of the other researchers. The data that has been used is not the present data, but the data

has been reliable at some point of time.

3.8 Secondary Data Analysis

As per the views of Bryman and Bell (2011), the secondary data that has been collected for the

purpose of the research has been validated and rectification of the thematic data has been done.

The data from the reliable sources that has been gathered for the purpose of the research has been

36

presented through the tabular form and the necessary mathematical calculations have been done

by using the data from the S&P 500 index. The data collected has also been tabulated and

represented in the form of the graphs for the purpose of proving the authentication of the data

used in the research.

3.9 Ethical considerations

According to Bergh and Ketchen (2009), secondary data is the usage of the past data. The data is

not recently collected for the purpose of the research but the entire data has been collected from

the reliable and valid sources. The data that has been used has not been tampered or has been

presented in arbitrary mode.

Entire data of this research is real and the data has been presented in the best possible way

according to the change of the market condition of the shares till the data of the using the valid

data. The authentic form of the data has been represented in both graphical and tabular form. The

calculations that have been shown are also based on the true data and the calculations are also

done in proper method.

3.10 Time schedule considered to perform research (Gantt chart)

The researcher follows the appropriate time schedule to conduct the research work in limited

time period by following the Gantt chart of research methodology. The below provided schedule

was followed by the researcher to conduct the research in appropriate manner.

Key activities 1st-2nd

week

3rd week

to 9th

week

10th week

to 15th

16th week

to 20th

week

21st week

to 23rd

week

24th week

Selection of the

topic

Composition of the

literature review

Research

methodology

37

Collection of

secondary data

Analysis and

interpretation of

secondary data

Findings

Conclusion and

Recommendation

Final submission

Table 1: Gantt chart

(Source: As created by Author)

3.11 Summary

In this chapter of research methodology, the researcher tries to make effort to create the most

appropriate and effective methodology to complete research work. The reliable research

methodology is adopted by studying the research onion. The methodology involves the

positivism philosophy, deductive approach, and analytical design to conduct the current research.

As the entire research is dependent on the case of the secondary data, the most reliable and the

valid data has been used by the researcher. The data represents the changes of the market

condition as the price of the shares are due to change on everyday basis and the change is

different for the different types of the industries that have been listed in the index.

38

Chapter 4: Data analysis and Findings

4.1 Introduction

This particular research is based on the secondary data only. The process of collecting the

secondary data is rather easy as compared to the collection of the primary data. Researcher needs

to collect the required data from the works of the past researchers. Other reliable sources of the

data collection are the books, journals, magazines, and the most reliable of all is the website that

can be accessed from the internet and from the own site of the company and also from the site of

the index publishers. The published articles of the different credit rating agencies are also the

reliable sources of gathering the secondary data. In general the reliability and the acceptability of

the secondary data changes from one case to other but the results received due to the presentation

of the secondary data is going to be changed and different than the result that will be obtained

from the primary data.

4.2 Critical evaluation of the issues related to the market returns of the S&P 500 indexes

under S & P 500 indexes

Share Market condition

The condition of the share market for the last 10 years is not that much influencing or

progressive. The price of the shares have shown rise in some parts but have also shown sharp

falls during the major part of the time span. The market has been very much vulnerable and the

predictions regarding the growth have proven wrong for moist of the time.

The present period has experienced the growth of the share prices but has lasted for a short

period. As per the views of Alaska (2010), the vulnerable condition of the entire market is due to

some avoidable and unavoidable conditions that are present in the economical cycle of the entire

economy and in all the countries of the same continent. The factors are the recession in the world

economy, rise in the prices of the relevant products and the decline of the value of the currencies

of the most developed countries and the decrease in the purchasing power of the S&P 500 index.

(For graph refer to appendix 1)

The last 10 years condition of the share market belonging to the S&P 500 index are also the same

39

as compared to the other indexes like Bloomberg terminal and others. In this particular period,

the performances of the industries have changed a lot. Some of the industries have made high

range of profit while some of the industries are in the successive years of loss making. If a close

look is made in the performance of the hedge funds, the decimation is clearly seen. Cenesizoglu

(2011) opined that the performance of the hedge funds have tended to underperform in the entire

market scenario as the involved risks have increased a lot in the last decade. In addition, until the

present date the expected rate of the return has not reached the expected level or the calculated

result that has been made by the market experts. Due to the factor of taking short-term strategies

by the S&P 500 index regarding the investment structure of the company the rate of the

investment return has been decreasing a lot in the present time. Since the year 1995, the annual

returns from the second quarter of the year has remained nearly around 8-8.6%, and has

experienced the growth till 9% at the maximum level. At the later part of the decade, the S&P

500 index started to perform better than the hedge funds and the rate of the annual returns have

increased to the limit of double of the hedge funds. The result has been derived as the correlation

co efficient between the two indices has depicted the result of 0.6 and the beta factor has not

risen up than the level of 033 since the last decade (Kang et al. 2010)

(For Graph refer to appendix 2)

After the massive crash in the share market of the entire world, the market has remained unable

to recover from the position of making losses. The result can be proved, as the growth rate of the

shares has remained the same since the last 10 years regarding the annual return from the

investments. The presence of huge amount of credit in the market has declined the position of the

stock market, as the time needed for recovering the money has been difficult due to the lack of

the liquid money in the hands of the people. According to Darner (2008), People has also

adopted the tendency to invest in the less risky shares as the risky shares have the tendency to

bring more profit but is vulnerable to massive fall in the present market conditions.

Among the entire listed S&P 500 index in the S&P 500 index, the most profitable industries are

the telecommunication, industries, health, and social care, consumer goods, information

technology. While the loss making S&P 500 index listed in the sectors are the industries like the

beauty products, and the products like garments and many more small level industries.

Profit making Industries

40

The profit making industries belonging to the S&P 500 for the last 10 years are the goods

industry, energy S&P 500 index, consumer goods industries, the industry relating to the means of

media communication, financial institutions and the insurance sector, software industry, the

health care and telecommunications.

Cameron (2009) opined that in relation to these industries, the most profitable industries have

enjoyed the growth. If the performance of these industries is taken for the period of the last 80

year or so, then it can be said that the S&P 500 index belonging to these industries have enjoyed

a medium level to high level of growth in the index price of the shares. For finding out the

profitability of the industries, the recent data on the profitability of the industries for the last 6

months to 1 year has been analyzed. In addition, the results show that the industries have enjoyed

quite high range of profitability and have all the positive predictions regarding the growth in the

next one-year or so.

Industries Last 1 year growth Last 6 months

growth

Present rate of

growth

Financial

company(Banks,

insurance and

others)

6.8 7.6 7.7

Materials

(Commercial and

consumer goods)

8.1 8.2 8.5

Health care

(services)

4.6 4.7 4.7

I.T. (hardware and

software)

19.9 19.4 20.0

Telecommunication 10.4 10.4 10.4

Food industry 2.8 2.8 2.8

Energy (Oil and gas) 11.7 12.5 12.7

Media houses 9.7 9.8 10.2

41

Table 2: Table showing the growth of the profitable industries of S&P 500 Index

(Source: Business Insider, 2015

Statisticslast 1 year growth rate

Last 6 months growth

Present rate of growth

NValid 8 8 8Missing 0 0 0

Mean 9.2500 9.4250 9.6250Std. Error of Mean 1.84923 1.79829 1.86047Median 8.9000 9.0000 9.3500Mode 2.80a 2.80a 2.80a

Std. Deviation 5.23041 5.08633 5.26220Variance 27.357 25.871 27.691Skewness 1.117 .895 .916Std. Error of Skewness

.752 .752 .752

Kurtosis 2.035 1.467 1.561Std. Error of Kurtosis 1.481 1.481 1.481Range 17.10 16.60 17.20Minimum 2.80 2.80 2.80Maximum 19.90 19.40 20.00

Percentiles25 5.1500 5.4250 5.450050 8.9000 9.0000 9.350075 11.3750 11.9750 12.1250

a. Multiple modes exist. The smallest value is shown

Statisticslast 1 year growth rate

Last 6 months growth

Present rate of growth

NValid 8 8 8Missing 0 0 0

Mean 9.2500 9.4250 9.6250Std. Error of Mean 1.84923 1.79829 1.86047Median 8.9000 9.0000 9.3500Mode 2.80a 2.80a 2.80a

42

Std. Deviation 5.23041 5.08633 5.26220Variance 27.357 25.871 27.691Skewness 1.117 .895 .916Std. Error of Skewness

.752 .752 .752

Kurtosis 2.035 1.467 1.561Std. Error of Kurtosis 1.481 1.481 1.481Range 17.10 16.60 17.20Minimum 2.80 2.80 2.80Maximum 19.90 19.40 20.00

Percentiles25 5.1500 5.4250 5.450050 8.9000 9.0000 9.350075 11.3750 11.9750 12.1250

a. Multiple modes exist. The smallest value is shown

last 1 year growth rateFrequency Percent Valid

PercentCumulative

Percent

Valid

2.80 1 12.5 12.5 12.54.60 1 12.5 12.5 25.06.80 1 12.5 12.5 37.58.10 1 12.5 12.5 50.09.70 1 12.5 12.5 62.510.40 1 12.5 12.5 75.011.70 1 12.5 12.5 87.519.90 1 12.5 12.5 100.0Total 8 100.0 100.0

Table 3: Table showing the statistical data of the profitable industries listed in S&P 500

(Source: As created by author)

43

44

6.8 8.14.6

19.9

10.4

2.8

11.7 9.77.6 8.24.7

19.4

10.4

2.8

12.59.87.7 8.5

4.7

20

10.4

2.8

12.710.2

Growth of the industries

Figure 7: Graph showing the growth rate of the profitable industries for the last 1 year to

present

(Source: Created by author)

Analysis

After conducting the entire study of the profitable industries of the above-mentioned S&P 500

45

index, it can be easily depicted that the period of the last 1 year until the present times have

enjoyed the maximum level of the growth. However, the margin is not very high but it is still in a

strong position related to the other industries of the index (Jiang, 2009).

Among the profitable industries, the most profitable part of the industry belongs to the I.T.

section that has enjoyed the growth. In addition, at present is settled at the level of 20.0%. The

next performance of growth has been depicted for the Energy industry where the oil and gas S&P

500 index have been able to enjoy a successful growth rate of more than 12 and counts for 12.7

at the present. As expected, the next best performer is the sector of telecommunication presently

standing at the rate of 10.4 since the last 1-year or so. However, in the context of the growth rate

of the other industries, the sector of health care and the food industry are still unable to enjoy the

growth rate of 5. Counting the growth of the food industry of 2.8% and 4.7% of health care and it

can be said that these two industries can be categorized as the less performing or the industries

that are vulnerable to make losses in the upcoming years.

Industries facing major loss

Likewise, some of the industries listed in the S&P 500 index are still underperforming and in the

present the S&P 500 index of the specific industries are on the verge of incurring losses. The

respective loss making sectors of the S&P 500 indexed S&P 500 index. From the website it can

be seen that the sectors of food, health care and the sector of the mutual funds are the most

important and the seriously loss making industries. The sectors of beauty products and garments

are also easily included in the list of the loss making industries in USA.

If a close observation is made in the above-mentioned loss making industries, it can be said that

the S&P 500 index having a pure and proper brand value. Moreover, a huge base of the

customers is on the higher side of the business where as the minor or the entry level industries of

these sectors are the major sufferers. Due to the purpose of making an entry in the market and

creating a reputation in the market and enter in the competition, these S&P 500 index or the

brands try to make different types of strategies in order to attract the views of the customers.

In case of investing in the hedge bonds in the mutual fund sector, the investors have received the

return of about 0.4% in the previous financial year.

Industries Last 1 year growth Last 6 months

growth

Present rate of

growth

46

Food industry 2.8 2.8 2.8

Clothing 2.4 2.4 2.2

Beauty products 1.89 2.0 2.2

Mutual funds 0.5 0.4 0.4

USA retail market 1.3 2.85 2.5

Table 4: Table showing the decline of the loss making industries of S&P 500 Index

(Source: Business Insider, 2015)

StatisticsLast 1 year

growthLast 6 months growth

Present rate of growth

NValid 5 5 5Missing 0 0 0

Mean 1.7780 2.0900 2.0200Std. Error of Mean .40655 .44956 .42000Median 1.8900a 2.4000a 2.3000a

Mode .50b .40b 2.20Std. Deviation .90908 1.00524 .93915Variance .826 1.011 .882Skewness -.492 -1.641 -1.838Std. Error of Skewness

.913 .913 .913

Kurtosis -.751 2.717 3.751Std. Error of Kurtosis 2.000 2.000 2.000Range 2.30 2.45 2.40Minimum .50 .40 .40Maximum 2.80 2.85 2.80Sum 8.89 10.45 10.10Percentiles 10 .5000c .4000c .4000c

20 .9000 1.2000 1.000025 1.1000 1.6000 1.300030 1.3000 2.0000 1.600040 1.5950 2.2000 2.200050 1.8900 2.4000 2.3000

47

60 2.1450 2.6000 2.400070 2.4000 2.8000 2.500075 2.5000 2.8125 2.575080 2.6000 2.8250 2.650090 2.8000 2.8500 2.8000

a. Calculated from grouped data.b. Multiple modes exist. The smallest value is shownc. Percentiles are calculated from grouped data.

Last 1 year growthFrequency Percent Valid

PercentCumulative

Percent

Valid

.50 1 20.0 20.0 20.01.30 1 20.0 20.0 40.01.89 1 20.0 20.0 60.02.40 1 20.0 20.0 80.02.80 1 20.0 20.0 100.0Total 5 100.0 100.0

Last 6 months growthFrequency Percent Valid

PercentCumulative

Percent

Valid

.40 1 20.0 20.0 20.02.00 1 20.0 20.0 40.02.40 1 20.0 20.0 60.02.80 1 20.0 20.0 80.02.85 1 20.0 20.0 100.0Total 5 100.0 100.0

Present rate of growthFrequency Percent Valid

PercentCumulative

Percent

48

Valid

.40 1 20.0 20.0 20.02.20 2 40.0 40.0 60.02.50 1 20.0 20.0 80.02.80 1 20.0 20.0 100.0Total 5 100.0 100.0

Table 5: Table showing the statistical data of the loss making industries listed in S&P 500

(Source: As created by author)

49

50

Loss making industries

Fooding industryClothingBeauty productsMutual fundsUK retail market

Figure 8: Graph showing the growth rate of the profitable industries for the last 1 year to

present

(Source: Created by author)

Despite of reviewing the reports published about the low performance of the loss making

industries belonging in the S&P 500 index, still other industries are less in performance due to

the certain existing factors in the industry. The factors are described as follows:

Presence of the Reputed S&P 500 index having positive brand image

Existence of the minor S&P 500 index

All the S&P 500 index are not included in the stock indices

Downswing of the entire economy

Recession all over the world, especially in the developed industries

According to Penman et al. (2009) though these factors are present there are still some S&P 500

index belonging to the particular loss making industry that has been able to make huge profits in

these particular years. The S&P 500 index like Delta Airlines, Pepco Holding co, etc all have

been able to make huge profits in the context of the loss-making period of the entire period.

When these S&P 500 index are making huge profits, the other S&P 500 index belonging to the

particular industry are found suffering in the position of break even, loss or have to stick to the

strategy of making charity pricing. In many cases, some of the companies listed in the S&P 500

51

index had to withdraw from the business sector in order to save the capital of the company and

then wait for the favorable conditions to arrive so that the business can be made profitable.

Actually, the scenario has been adverse for the people even in making the investment in the

mutual funds. The declining pattern of the business of the mutual fund industry is due to the

preference of the less risky shares as the investors are not keen to make any loss of the liquid

money in the share market. The investors are generally interested to save the capital money and

even lately the number of investor have declined up to a certain limit and that is one of the main

reasons behind the overall decline of the mutual fund sector (Lam, 2009).

The case scenario is quite same in respect of the companies belonging to the food and the

clothing industry. Generally, it has been seen that the listed companies, the reputation of the

brands are catchier to the users and the majority of the users stick to the particular type of the

brand or the product. The quality of the food and the dress material is the main concern for the

users, as the people are less interested to make les expenses regarding the purchase of the

garments, and not interested to eat outside too often, so the sales figures of these less known

brands are mostly hampered.

Though the price of the branded products is higher than the less known products, still people

have developed the habit of preferring the quality of the product to the price of the product. Jiang

and Lee (2007) opined there is also a concern regarding the sector of health and social care.

Though this particular sector is not a profit making industry but still it has been seen that the

concern of people regarding the health of the people is still very less and that is the reason for

suffering of this particular sector. Though the different health care agencies are trying to improve

the condition of this particular sector, still the rate has been in the declining version.

Industries Present rate of

growth

Present rate of

decline

Financial

company(Banks,

insurance and

others)

7.7 N/A

Materials 8.5 N/A

52

(Commercial and

consumer goods)

Health care

(services)

4.7 N/A

I.T. (hardware and

software)

20.0 N/A

Telecommunication 10.4 N/A

Food industry 2.8 N/A

Energy (Oil and gas) 12.7 N/A

Media houses 10.2 N/A

Food industry

(Restaurants)

N/A 2.8

Clothing N/A 2.2

Beauty products N/A 2.2

Mutual funds N/A 0.4

USA retail market N/A 2.5

Table 6: Table showing the decline of the loss making industries of S&P 500 Index

(Source: Business Insider, 2015)

StatisticsPresent rate of growth

Present rate of decline

NValid 13 13Missing 0 0

Mean 5.9231 .78Std. Error of Mean 1.75207 .321Median 4.7000 .00Mode .00 0Std. Deviation 6.31719 1.158Variance 39.907 1.340Skewness .867 .975

53

Std. Error of Skewness

.616 .616

Kurtosis .265 -1.110Std. Error of Kurtosis 1.191 1.191Range 20.00 3Minimum .00 0Maximum 20.00 3Sum 77.00 10

Percentiles

10 .0000 .0020 .0000 .0025 .0000 .0030 .0000 .0040 1.6800 .0050 4.7000 .0060 8.0200 .1670 9.8600 1.8475 10.3000 2.2080 10.8600 2.2690 17.0800 2.68

Present rate of growthFrequency Percent Valid

PercentCumulative

Percent

Valid

.00 5 38.5 38.5 38.52.80 1 7.7 7.7 46.24.70 1 7.7 7.7 53.87.70 1 7.7 7.7 61.58.50 1 7.7 7.7 69.210.20 1 7.7 7.7 76.910.40 1 7.7 7.7 84.612.70 1 7.7 7.7 92.320.00 1 7.7 7.7 100.0Total 13 100.0 100.0

Present rate of decline

54

Frequency Percent Valid Percent

Cumulative Percent

Valid

0 8 61.5 61.5 61.50 1 7.7 7.7 69.22 2 15.4 15.4 84.63 1 7.7 7.7 92.33 1 7.7 7.7 100.0Total 13 100.0 100.0

Table 7: Table showing the statistical data of the loss making industries listed in S&P 500

(Source: As created by author)

55

0

7.7 8.54.7

20

10.4

2.8

12.710.2

0 0 0 0 00

0 00

0

0

0

00

2.8 2.2 2.2 0.4 2.52

2 3 5

Trend line showing growth and decline

56

Figure 9: Graph showing the trend of growth and decline of the related industries

(Source: Created by author)

The trend lines show the volatility of the industry as per the growth and the fall of the S&P 500

index belonging to the same industry. But, still the fact is that the non performing S&P 500 index

are unable to make the business as per the demand of the industry, but still the leaders of the

respective industry are the major performers still in the present situation and would continue to

do so in the future years (Basu, 2008).

S&P 500 index Situation in context to financial status of the USA market

According to the financial status of the market, the S&P 500 index are not able to perform as per

the required goal of the company. The main motive of the listed companies is to keep the

business alive and then attract the new customers. Here, companies having a positive brand

image among the following customers are able to retain the old customers as well as bring new

customers.

Now the companies are not making any decision regarding the expansion of the business

especially in the European countries. Nevertheless, there are still some places in USA, where

demands of products manufactured and sold by this loss making industry have quite higher

demand. As per the views of Lam (2009), even the high profile companies in the sector of the

garments and the food chains are still unable to make the business expenses or take any decision

regarding the expansion. The major sufferers are the small and the less reputed business units.

The industry related to the making investments in the mutual fund market is in the worst

condition ever. The returns are so much unpredictable and due to successive loss making of the

particular sector, the rate of making investments has gone down by far limits.

Now, if a close look is made in the profitable sectors of the market, the sectors that has been able

to make profits successively for the last one year has kept the rate of the growth constant and

even higher than the market predictions. Actually, the reason behind the growth of these

particular sectors has a proper economical reason. The demand of the products of these sectors

have grown excessively and that has lead to the reduction of the price of the products, the actual

reason behind the consumption of these products and helping the industry directly in the

favourable manner towards growth. According to Piotroski (2007), in perspective to the rise and

fall in the market conditions that has been observed since the last decade is also due to the

political turmoil in the some of the countries. The excessive rise in the price of gold and the

57

political effect in the major petroleum producing countries have led towards the situation of the

declining market condition. Therefore, it can be concluded that some of the industries have been

able to make high profit whereas the others are in the course of making losses or even towards

the position of shut down

Analysis of the return of S&P 500 index for the period of 1926 to 2013

For this research, analysing the returns from the shares of the companies listed in the S&P 500

index has been made. The data used for this particular analysis is taken from S&P 500 index

website. The return rate for the year is calculated in the basis of annual, monthly and quarterly

basis.

It is easily seen that prices of this index have experienced major fall. In most of the years,

especially when market recession was persisting in this economy, the market rate fell at a

massive rate. To make detail analysis of the return rates, the data is divided into 2 parts. The

analysis is done in details for annual, monthly and quarterly basis. For making a better study, the

index data is divided into 3 parts. This segregation helped the researcher to make a detail

analysis of the history of S&P 500 index starting from 1926 until 2013.

Date (Year) Index Book to market Dividend Yield

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

13.49

17.66

24.35

21.45

15.34

8.12

6.89

10.10

9.50

13.43

17.18

10.55

13.21

0.4414758270

0.3746885899

0.2596666667

0.3384578236

0.5547454126

1.1707317073

1.4420843014

0.8290260464

0.7737408689

0.5599111913

0.4585881045

0.7074886223

0.5720393884

0.051148999

0.043601359

0.034907598

0.045221445

0.063885267

0.100985222

0.07256894

0.043564356

0.047368421

0.034996277

0.041909197

0.075829384

0.038607116

58

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

12.49

10.58

8.69

9.77

11.67

13.28

17.36

15.30

15.30

15.20

16.76

20.41

23.77

26.57

24.81

35.98

45.48

46.67

39.99

55.21

59.89

58.11

71.55

63.10

75.02

84.75

92.43

80.33

96.47

0.5807053804

0.7290475101

0.8895097332

0.8626465662

0.7874015748

0.7437635753

0.6132393344

0.6924379233

0.7253256790

0.8409475465

0.7964292839

0.7225384419

0.7213163466

0.6940733128

0.7597009612

0.6041197854

0.5098280098

0.5441768274

0.6536757786

0.5117793198

0.4577837965

0.5504229651

0.5059222584

0.5916270511

0.5255914542

0.4872273003

0.4306378062

0.5769451056

0.5257924451

0.049639712

0.063327032

0.081703107

0.060388946

0.05227078

0.048192771

0.038018433

0.046405229

0.054901961

0.061184211

0.068019093

0.072023518

0.059318469

0.053067369

0.058444176

0.042801556

0.036059807

0.037283051

0.04476119

0.031697156

0.030556019

0.033557047

0.028232006

0.033755943

0.030391895

0.029498525

0.029427675

0.035727624

0.030268477

59

Table 8: Table showing index, book to market and dividend yield of S&P 500 indexes

(1926-1966)

(Source: S&P 500)

Statistics Present rate of growth

Present rate of decline

NValid 13 13Missing 0 0

Mean 5.9231 .78Std. Error of Mean 1.75207 .321Median 4.7000 .00Mode .00 0Std. Deviation 6.31719 1.158Variance 39.907 1.340Skewness .867 .975Std. Error of Skewness

.616 .616

Kurtosis .265 -1.110Std. Error of Kurtosis 1.191 1.191Range 20.00 3Minimum .00 0Maximum 20.00 3Sum 77.00 10

Percentiles

10 .0000 .0020 .0000 .0025 .0000 .0030 .0000 .0040 1.6800 .0050 4.7000 .0060 8.0200 .1670 9.8600 1.8475 10.3000 2.2080 10.8600 2.2690 17.0800 2.68

60

Present rate of growthFrequency Percent Valid

PercentCumulative

Percent

Valid

.00 5 38.5 38.5 38.52.80 1 7.7 7.7 46.24.70 1 7.7 7.7 53.87.70 1 7.7 7.7 61.58.50 1 7.7 7.7 69.210.20 1 7.7 7.7 76.910.40 1 7.7 7.7 84.612.70 1 7.7 7.7 92.320.00 1 7.7 7.7 100.0Total 13 100.0 100.0

Present rate of decline Frequency Percent Valid

PercentCumulative

Percent

Valid

0 8 61.5 61.5 61.50 1 7.7 7.7 69.22 2 15.4 15.4 84.63 1 7.7 7.7 92.33 1 7.7 7.7 100.0Total 13 100.0 100.0

Table 9: Table showing index, book to market and dividend yield of S&P 500 indexes

(1926-1966)

(Source: S&P 500)

61

62

StatisticsS&P500

IndexBook to market

Dividend Yield

NValid 42 42 42Missing 0 0 0

Mean 31.6240476 .6456490 .0484647Std. Error of Mean 4.07166426 .03271802 .00254928Median 17.5100000 .5978734 .0449913Mode 15.30000 .25967a .02823a

Std. Deviation 26.38740027 .21203701 .01652119Variance 696.295 .045 .000Skewness 1.168 1.461 1.056Std. Error of Skewness

.365 .365 .365

Kurtosis .076 4.222 1.103Std. Error of Kurtosis .717 .717 .717Range 89.58000 1.18242 .07275Minimum 6.89000 .25967 .02823Maximum 96.47000 1.44208 .10099Sum 1328.21000 27.11726 2.03552

Percentiles

10 9.5810000 .4338892 .030305520 11.2340000 .4984443 .033676425 13.0300000 .5112915 .034974130 13.4150000 .5257723 .036026640 15.3080000 .5623368 .042087750 17.5100000 .5978734 .044991360 24.2340000 .6937462 .049350370 40.5390000 .7256979 .055256275 48.8050000 .7477479 .059586180 58.8220000 .7792052 .062041390 78.7370000 .8561369 .0724053

a. Multiple modes exist. The smallest value is shown

S&P500 IndexFrequency Percent Valid

PercentCumulative

PercentValid 6.89000 1 2.4 2.4 2.4

63

8.12000 1 2.4 2.4 4.88.69000 1 2.4 2.4 7.19.50000 1 2.4 2.4 9.59.77000 1 2.4 2.4 11.910.10000 1 2.4 2.4 14.310.55000 1 2.4 2.4 16.710.58000 1 2.4 2.4 19.011.67000 1 2.4 2.4 21.412.49000 1 2.4 2.4 23.813.21000 1 2.4 2.4 26.213.28000 1 2.4 2.4 28.613.43000 1 2.4 2.4 31.013.49000 1 2.4 2.4 33.315.20000 1 2.4 2.4 35.715.30000 2 4.8 4.8 40.515.34000 1 2.4 2.4 42.916.76000 1 2.4 2.4 45.217.18000 1 2.4 2.4 47.617.36000 1 2.4 2.4 50.017.66000 1 2.4 2.4 52.420.41000 1 2.4 2.4 54.821.45000 1 2.4 2.4 57.123.77000 1 2.4 2.4 59.524.35000 1 2.4 2.4 61.924.81000 1 2.4 2.4 64.326.57000 1 2.4 2.4 66.735.98000 1 2.4 2.4 69.039.99000 1 2.4 2.4 71.445.48000 1 2.4 2.4 73.846.67000 1 2.4 2.4 76.255.21000 1 2.4 2.4 78.658.11000 1 2.4 2.4 81.059.89000 1 2.4 2.4 83.363.10000 1 2.4 2.4 85.771.55000 1 2.4 2.4 88.1

64

75.02000 1 2.4 2.4 90.580.33000 1 2.4 2.4 92.984.75000 1 2.4 2.4 95.292.43000 1 2.4 2.4 97.696.47000 1 2.4 2.4 100.0Total 42 100.0 100.0

Book to marketFrequency Percent Valid

PercentCumulative

PercentValid .25967 1 2.4 2.4 2.4

.33846 1 2.4 2.4 4.8

.37469 1 2.4 2.4 7.1

.43064 1 2.4 2.4 9.5

.44148 1 2.4 2.4 11.9

.45778 1 2.4 2.4 14.3

.45859 1 2.4 2.4 16.7

.48723 1 2.4 2.4 19.0

.50592 1 2.4 2.4 21.4

.50983 1 2.4 2.4 23.8

.51178 1 2.4 2.4 26.2

.52559 1 2.4 2.4 28.6

.52579 1 2.4 2.4 31.0

.54418 1 2.4 2.4 33.3

.55042 1 2.4 2.4 35.7

.55475 1 2.4 2.4 38.1

.55991 1 2.4 2.4 40.5

.57204 1 2.4 2.4 42.9

.57695 1 2.4 2.4 45.2

.58071 1 2.4 2.4 47.6

.59163 1 2.4 2.4 50.0

.60412 1 2.4 2.4 52.4

.61324 1 2.4 2.4 54.8

.65368 1 2.4 2.4 57.1

.69244 1 2.4 2.4 59.5

65

.69407 1 2.4 2.4 61.9

.70749 1 2.4 2.4 64.3

.72132 1 2.4 2.4 66.7

.72254 1 2.4 2.4 69.0

.72533 1 2.4 2.4 71.4

.72905 1 2.4 2.4 73.8

.74376 1 2.4 2.4 76.2

.75970 1 2.4 2.4 78.6

.77374 1 2.4 2.4 81.0

.78740 1 2.4 2.4 83.3

.79643 1 2.4 2.4 85.7

.82903 1 2.4 2.4 88.1

.84095 1 2.4 2.4 90.5

.86265 1 2.4 2.4 92.9

.88951 1 2.4 2.4 95.21.17073 1 2.4 2.4 97.61.44208 1 2.4 2.4 100.0Total 42 100.0 100.0

Dividend YieldFrequency Percent Valid

PercentCumulative

PercentValid .02823 1 2.4 2.4 2.4

.02943 1 2.4 2.4 4.8

.02950 1 2.4 2.4 7.1

.03027 1 2.4 2.4 9.5

.03039 1 2.4 2.4 11.9

.03056 1 2.4 2.4 14.3

.03170 1 2.4 2.4 16.7

.03356 1 2.4 2.4 19.0

.03376 1 2.4 2.4 21.4

.03491 1 2.4 2.4 23.8

.03500 1 2.4 2.4 26.2

.03573 1 2.4 2.4 28.6

.03606 1 2.4 2.4 31.0

66

.03728 1 2.4 2.4 33.3

.03802 1 2.4 2.4 35.7

.03861 1 2.4 2.4 38.1

.04191 1 2.4 2.4 40.5

.04280 1 2.4 2.4 42.9

.04356 1 2.4 2.4 45.2

.04360 1 2.4 2.4 47.6

.04476 1 2.4 2.4 50.0

.04522 1 2.4 2.4 52.4

.04641 1 2.4 2.4 54.8

.04737 1 2.4 2.4 57.1

.04819 1 2.4 2.4 59.5

.04964 1 2.4 2.4 61.9

.05115 1 2.4 2.4 64.3

.05227 1 2.4 2.4 66.7

.05307 1 2.4 2.4 69.0

.05490 1 2.4 2.4 71.4

.05844 1 2.4 2.4 73.8

.05932 1 2.4 2.4 76.2

.06039 1 2.4 2.4 78.6

.06118 1 2.4 2.4 81.0

.06333 1 2.4 2.4 83.3

.06389 1 2.4 2.4 85.7

.06802 1 2.4 2.4 88.1

.07202 1 2.4 2.4 90.5

.07257 1 2.4 2.4 92.9

.07583 1 2.4 2.4 95.2

.08170 1 2.4 2.4 97.6

.10099 1 2.4 2.4 100.0Total 42 100.0 100.0

Table 10: Table showing index, book to market and dividend yield of S&P 500 indexes

(1926-1966)

(Source: S&P 500)

67

68

Date (Y

ear)1926

19281930

19321934

19361938

19401942

19441946

19481950

19521954

19561958

19601962

19641966

0

20

40

60

80

100

120

Figure 10: Graph showing the index of S&P 500 index from 1926 to 1966

(Source: Created by author)

It is observed that the time from 1926 to 1967 enjoyed the index as much as 96.47 and the lowest

index was 6.89. The majority of book to market returns were below 1.0, while the lowest being

69

0.25. It states that this period enjoyed the maximum growth. The returns on the index S&P 500

was higher during the years 1952 to 1966

Date (Year) Index Book to market Dividend yield

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

103.86

92.06

92.15

102.09

118.05

97.55

68.56

90.19

107.46

95.10

96.11

107.94

135.76

122.55

140.64

164.93

167.24

211.28

242.17

247.08

277.72

353.40

330.22

417.09

435.71

466.45

0.5049006623

0.6510820131

0.6464263577

0.6439002471

0.5956745946

0.7555884634

1.1200181747

0.8763388510

0.7799731250

0.9603330245

1.0457012956

1.0619500680

0.8915030239

1.0611428571

0.9322147266

0.7003591178

0.7330983765

0.5926926882

0.4984308658

0.5088120155

0.4652835740

0.3904547436

0.4844968599

0.4203444173

0.3941096142

0.3052672229

0.029559022

0.03432544

0.034074878

0.030071506

0.026683609

0.034648898

0.052508751

0.04080275

0.037688442

0.049106204

0.052752055

0.052343895

0.04537419

0.054100367

0.048848123

0.042987934

0.045025114

0.03739114

0.034190858

0.035656468

0.035035287

0.031267685

0.036611956

0.029250282

0.028413394

0.026969664

70

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

459.27

615.93

740.74

970.43

1,229.23

1,469.25

1,320.28

1,148.08

879.82

1,111.92

1,211.92

1,248.29

1,418.30

1,468.36

903.25

1,115.10

1,257.64

1,257.60

1,426.19

1,848.36

0.2915683000

0.2550263829

0.2073427297

0.1788008842

0.1736113154

0.1471672594

0.1518515036

0.1312178459

0.2953858956

0.2187398648

0.2706192427

0.3134779566

0.2816823997

0.2505829731

0.3549842247

0.3255306601

0.3581003169

0.3572325407

0.3490324432

0.3044081256

0.028697716

0.022388908

0.02011502

0.015961996

0.013178982

0.011359537

0.012323144

0.013709846

0.018273056

0.015635118

0.016040663

0.017800351

0.017542833

0.018885757

0.031427622

0.020094423

0.018073535

0.021012246

0.021909423

0.018930295

Table 11: Table showing index, book to market and dividend yield of S&P 500 indexes

(1967-2013)

(Source: S&P 500)

StatisticsS&P500

IndexBook to market

Dividend Yield

NValid 46 46 46Missing 0 0 0

71

Mean 608.3330435 .5051404 .0299793Std. Error of Mean 79.08799172 .04197430 .00182926Median 385.2450000 .4072270 .0294047Mode 68.56000a .13122a .01136a

Std. Deviation536.4008575

3.28468353 .01240666

Variance 287725.880 .081 .000Skewness .610 .702 .385Std. Error of Skewness

.350 .350 .350

Kurtosis -1.131 -.629 -.884Std. Error of Kurtosis .688 .688 .688Range 1779.80000 .98880 .04274Minimum 68.56000 .13122 .01136Maximum 1848.36000 1.12002 .05410Sum 27983.32000 23.23646 1.37905

Percentiles

10 94.2150000 .1772440 .015057520 105.3000000 .2612635 .017909625 115.5225000 .2890968 .018732630 136.2480000 .3044940 .020096540 235.9920000 .3537939 .025824750 385.2450000 .4072270 .029404760 640.8920000 .5056829 .0340981

701097.771000

0.6461737 .0355943

751164.040000

0.7085439 .0374655

801240.666000

0.7702193 .0421139

901420.667000

0.9859435 .0500775

a. Multiple modes exist. The smallest value is shown

S&P500 IndexFrequency Percent Valid

PercentCumulative

PercentValid 68.56000 1 2.2 2.2 2.2

72

90.19000 1 2.2 2.2 4.392.06000 1 2.2 2.2 6.592.15000 1 2.2 2.2 8.795.10000 1 2.2 2.2 10.996.11000 1 2.2 2.2 13.097.55000 1 2.2 2.2 15.2102.09000 1 2.2 2.2 17.4103.86000 1 2.2 2.2 19.6107.46000 1 2.2 2.2 21.7107.94000 1 2.2 2.2 23.9118.05000 1 2.2 2.2 26.1122.55000 1 2.2 2.2 28.3135.76000 1 2.2 2.2 30.4140.64000 1 2.2 2.2 32.6164.93000 1 2.2 2.2 34.8167.24000 1 2.2 2.2 37.0211.28000 1 2.2 2.2 39.1242.17000 1 2.2 2.2 41.3247.08000 1 2.2 2.2 43.5277.72000 1 2.2 2.2 45.7330.22000 1 2.2 2.2 47.8353.40000 1 2.2 2.2 50.0417.09000 1 2.2 2.2 52.2435.71000 1 2.2 2.2 54.3459.27000 1 2.2 2.2 56.5466.45000 1 2.2 2.2 58.7615.93000 1 2.2 2.2 60.9740.74000 1 2.2 2.2 63.0879.82000 1 2.2 2.2 65.2903.25000 1 2.2 2.2 67.4970.43000 1 2.2 2.2 69.61111.92000 1 2.2 2.2 71.71115.10000 1 2.2 2.2 73.91148.08000 1 2.2 2.2 76.11211.92000 1 2.2 2.2 78.3

73

1229.23000 1 2.2 2.2 80.41248.29000 1 2.2 2.2 82.61257.60000 1 2.2 2.2 84.81257.64000 1 2.2 2.2 87.01320.28000 1 2.2 2.2 89.11418.30000 1 2.2 2.2 91.31426.19000 1 2.2 2.2 93.51468.36000 1 2.2 2.2 95.71469.25000 1 2.2 2.2 97.81848.36000 1 2.2 2.2 100.0Total 46 100.0 100.0

Book to marketFrequency Percent Valid

PercentCumulative

PercentValid .13122 1 2.2 2.2 2.2

.14717 1 2.2 2.2 4.3

.15185 1 2.2 2.2 6.5

.17361 1 2.2 2.2 8.7

.17880 1 2.2 2.2 10.9

.20734 1 2.2 2.2 13.0

.21874 1 2.2 2.2 15.2

.25058 1 2.2 2.2 17.4

.25503 1 2.2 2.2 19.6

.27062 1 2.2 2.2 21.7

.28168 1 2.2 2.2 23.9

.29157 1 2.2 2.2 26.1

.29539 1 2.2 2.2 28.3

.30441 1 2.2 2.2 30.4

.30527 1 2.2 2.2 32.6

.31348 1 2.2 2.2 34.8

.32553 1 2.2 2.2 37.0

.34903 1 2.2 2.2 39.1

.35498 1 2.2 2.2 41.3

.35723 1 2.2 2.2 43.5

74

.35810 1 2.2 2.2 45.7

.39045 1 2.2 2.2 47.8

.39411 1 2.2 2.2 50.0

.42034 1 2.2 2.2 52.2

.46528 1 2.2 2.2 54.3

.48450 1 2.2 2.2 56.5

.49843 1 2.2 2.2 58.7

.50490 1 2.2 2.2 60.9

.50881 1 2.2 2.2 63.0

.59269 1 2.2 2.2 65.2

.59567 1 2.2 2.2 67.4

.64390 1 2.2 2.2 69.6

.64643 1 2.2 2.2 71.7

.65108 1 2.2 2.2 73.9

.70036 1 2.2 2.2 76.1

.73310 1 2.2 2.2 78.3

.75559 1 2.2 2.2 80.4

.77997 1 2.2 2.2 82.6

.87634 1 2.2 2.2 84.8

.89150 1 2.2 2.2 87.0

.93221 1 2.2 2.2 89.1

.96033 1 2.2 2.2 91.31.04570 1 2.2 2.2 93.51.06114 1 2.2 2.2 95.71.06195 1 2.2 2.2 97.81.12002 1 2.2 2.2 100.0Total 46 100.0 100.0

Dividend YieldFrequency Percent Valid

PercentCumulative

PercentValid .01136 1 2.2 2.2 2.2

.01232 1 2.2 2.2 4.3

75

.01318 1 2.2 2.2 6.5

.01371 1 2.2 2.2 8.7

.01564 1 2.2 2.2 10.9

.01596 1 2.2 2.2 13.0

.01604 1 2.2 2.2 15.2

.01754 1 2.2 2.2 17.4

.01780 1 2.2 2.2 19.6

.01807 1 2.2 2.2 21.7

.01827 1 2.2 2.2 23.9

.01889 1 2.2 2.2 26.1

.01893 1 2.2 2.2 28.3

.02009 1 2.2 2.2 30.4

.02012 1 2.2 2.2 32.6

.02101 1 2.2 2.2 34.8

.02191 1 2.2 2.2 37.0

.02239 1 2.2 2.2 39.1

.02668 1 2.2 2.2 41.3

.02697 1 2.2 2.2 43.5

.02841 1 2.2 2.2 45.7

.02870 1 2.2 2.2 47.8

.02925 1 2.2 2.2 50.0

.02956 1 2.2 2.2 52.2

.03007 1 2.2 2.2 54.3

.03127 1 2.2 2.2 56.5

.03143 1 2.2 2.2 58.7

.03407 1 2.2 2.2 60.9

.03419 1 2.2 2.2 63.0

.03433 1 2.2 2.2 65.2

.03465 1 2.2 2.2 67.4

.03504 1 2.2 2.2 69.6

.03566 1 2.2 2.2 71.7

.03661 1 2.2 2.2 73.9

.03739 1 2.2 2.2 76.1

.03769 1 2.2 2.2 78.3

.04080 1 2.2 2.2 80.4

76

.04299 1 2.2 2.2 82.6

.04503 1 2.2 2.2 84.8

.04537 1 2.2 2.2 87.0

.04885 1 2.2 2.2 89.1

.04911 1 2.2 2.2 91.3

.05234 1 2.2 2.2 93.5

.05251 1 2.2 2.2 95.7

.05275 1 2.2 2.2 97.8

.05410 1 2.2 2.2 100.0Total 46 100.0 100.0

Table 12: Table showing index, book to market and dividend yield of S&P 500 indexes

(1967-2013)

(Source: S&P500 Index)

77

78

The later part of the time starting from 1968 to 2013, shows that index prices have fluctuated at a

massive rate. At some points, the index price was as low as 68.56, and in the year 2013 it

enjoyed the highest of 1848.36. During the recession years, the performance of the companies

listed in this index was low. At the same time, due to presence of high performing industries in

S&P 500 index, the returns did not differentiated massively. Though some of the industries failed

to perform, the investors received proper return most of the times.

Date (Y

ear)1968

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Figure 11: Graph showing the index of S&P 500 index from 1968 to 2013

(Source: Created by author)

From the above graph it can be stated that, index price was lower during years 1968 to 1994.

Since, 1996, the index kept on increasing.

Short analysis of monthly return

When the monthly returns starting from the same period are taken in to consideration, it shows

that during the years 1926 to 1967, the indexes have not differentiated highly. The prices of the

indexes ranged from 4.43 to 107.46.The index differentiation are quite higher. It demonstrated

that monthly fluctuations of shares took place. The payment of dividend by these listed

companies also fluctuated. During the later part, 1968 to 2013, the index prices crossed the mark

of 1000. On the same time, dividend payment was also increased.

79

Short analysis of Quarterly return

The quarterly analysis of the S&P 500 index during these particular years, reflect the same thing

as it was in case of monthly return rate. The fluctuations of indexes took place so did the rate of

payment of dividends. The stages during 1968 to 2013 displayed the positive results. During the

recession, that is post 2008 years, there was a massive fall in index price and dividend payout.

Comparison between Book to Market and Dividend Yield

Book to market ratio and dividend yield serve for a specific purpose. Book to market ratio is

used to find out future returns as compared to the present book value of the index. Dividend yield

on the other hand is the percentage form of dividend provided on a particular share. For this

particular series of data, the book to market ratio have produced higher figures when compared

to dividend yield.

4.3 Secondary Data Analysis

As the secondary data is meant to be collected from the sources like the magazines, newspaper,

journals, websites and the most commonly used and appropriate data has been gathered by the

previous researcher, And that is the reason that these data has the maximum chance of being the

most authenticate as well as appropriate (Penman et al. 2009).

Still, the present researcher has to check the authentication of the data whether the data that has

been used has been gathered from the exact and the reliable sources. It needs to be ensured that

the data that has been used is not arbitrary and the entire data has been organized and presented

in the proper form. The relative and the appropriate data that has been collected have to be within

the specific time limit so that the use of the excessively old and irrelevant data does not come

into force. As the entire research, matter is regarding the price of the stocks that are listed in the

S&P 500 index and these prices are subjected to change in the least amount of time. Due to the

change of the prices, the old data will be irrelevant and insignificant, the analysis will be very

difficult, and diverse if compared to the present value of the stock prices.

The authentication of the entire data will be proved, as the collected data will be represented in

the forms of the charts and the graphs as required. The primary data has the maximum chance of

being appropriate, but the authentication of the secondary data needs to be done for obtaining the

exact results.

As the data has been obtained from, the index of S&P 500 that has been collected for the specific

80

research needs to be explained in the thematic way. The themes that has been structured for the

particular research has to be described in the best possible way for the purpose of proving the

validity and the acceptability of the data. The use of SPSS analysis has been made to analyse the

data and interpret the results. The charts and tables used in this research are all created using this

particular software to analyse statistical data used.

4.4 Summary

This particular chapter is all about data analysis and findings. In this chapter, the researcher has

o0btained authentic secondary data and analysed these data properly. The pattern of rise and fall

of shares listed in S&P 500 index has been observed and analysed in proper manner.

The changes of the stock prices due to changing condition of the market have been observed in

these years. The risk factor and its relation with beta coefficient have been analysed. All the

relevant data collected for this research has been used appropriately without any biasness or

tampering. The complete set of data is valid as it is obtained from the S&P 500 index history.

The graphs and charts are created using SPSS analysis to receive exact result of the data used in

this research.

81

82

Chapter 5: Conclusion and Recommendation

5.1 Conclusion

This final part of the research helps the person carrying out the research to relate with the

different parameters of the index of the companies, regarding then returns. The companies listed

in S&P 500 index have been recorded with massive rate of the fall in the share prices over the

last few years.

Due to the fall of the share prices, the major companies are running out of investments. If the

history of the entire S&P 500 index starting from 19260to 2013 is clearly observed, then it is

clearly visible that in these years, the shares listed in the S&P 500 index have experienced major

crashes. But the shares have experienced major fall since the world wide recession in 2008. But

some of the industries listed in this index have experienced Massive growth even in this

particular situation also. Due to different scenarios and changing environment of the economy,

the share prices of this listed index are falling at a massive rate.

If the entire history of this index is followed, it is clearly seen that the average return during the

last year was nearly about 5.50%. If return rate for July, 2015 is observed, it will show that the

return is under 2.00%. It shows the instability of the index market. The investors with the help of

book to market ratio was alerted about this situation which resulted in the decreasing number of

investments in the recent years.

Book to market value is to find out future price of listed shares in comparison with the present

book value of the shares. Return rate can get changed at any time so it is bit difficult to receive

the exact figure of return by using book to market ratio. The use of this particular ratio has never

been used confidently, as in many cases the return rates were negative if aligned with the ratio

result.

5.2 Linking objectives with Findings and review of literature

The literature part of this research is entirely about Predictability of the market returns using

Book to market ratio. This research is all about how investors calculate book to market ratio to

find out an approximate value of returns of the specific shares listed in the index. The S&P 500

index being one of the major and one of the oldest indexes of USA, the investors of this country

83

has the optimum choice of investing in the shares listed in this index.

The objectives of this particular research is to evaluate the issues related to market returns of

different firms in related to the industry in context of the book value. The other objective of this

research is to suggest proper recommendations to the firms to solve the issues related to the ratio

of the market values.

If shares prices of the listed companies are taken into consideration, it is seen that some of the

industries have enjoyed major growth, while the others have failed deliberately. The industries

that flourished in these years are Information Technology, Energy, Banks and other consumer

products. Actually, the reasons for growth are due to massive demand of these industries in the

open market and individual demand of these products.

The failure of the industries like the restaurant, beauty products and retail market chains are due

to huge amount of competition and similar category of products sold in this market. The worst

result of this financial decline in for the mutual fund industry. Due to presence of high risk and

volatility of entire financial market, people are staying away from this industry.

The researcher wants to overcome these situations, certain recommendations are provided to the

investors and also to those listed companies facing the risk of business and running in loss. But

in the end it is advisable to the investors to make a close look in the condition of the market

before taking an investment decision. These ratios are to be used as precautionary measure and to

avoid financial loss; the results are to be followed wisely and according to present market

condition.

Objective 1: To critically evaluate the issues related to the market returns of the different firms

in related to the industry in context to the market value.

The researcher here wants to link this objective with the different main objectives of this

research. The main objectives of this particular research is all about the relation between the

book to market ratio and return s from investments from the shares listed in S&P 500 index. The

difference in return between dividend and market issue, the positive and negative features of

Book to market ratio and the macroeconomic factors that determine the return rate is linked in

this chapter of the research.

The concept of book to market ratio is all about finding out the future value of them shares

according to its present values. In USA, the investors make calculations to find out how much a

84

share price can increase in future.

This particular ratio calculation is about finding the future value of shares according to its book

value. It is one of the most widely used ratio calculation to predict growth of certain shares and

find out exactly which shares has the tendency to fall. This particular ratio has the potential to

produce nearly accurate results regarding the discrimination of the share prices. And in USA, the

use of this particular ratio has been widely used since the start of the year1900s.

In between the use of this ratio decreased, as it started to produce opposite results regarding

share price when compared to the prediction calculation. The rate of return from dividend and

from direct investment in listed shares of S&P 500 index is different in all aspects. When the

level of dividend payout is evaluated, only profit earned by a company is taken into use and

consideration. When Book to market ratio is used to find out rate of return from investment in

the shares listed in the index called S&P 500, there are different factors that are taken into

consideration.

In this scenario, there are some macroeconomic factors that control the entire market. These

factors play a huge role in determining the return and the condition of the entire index in the

future. The positive and the negative factors of this Book to market ratio is also evaluated. The

positive and these negative factors have made this particular ratio still one of the mostly used

calculative and precautionary measures to evaluate return rate from the indexed shares.

Objective 2: To suggest the suitable recommendations to the firms to solve the related issues

related to the ratios of the market value.

The industries listed under the S&P 500 index have witnessed falls in the index prices and have

also experienced negative results from calculating the Book to market ratio. Book to market ratio

has some problems that needs to be developed to reach the exact result from calculating this ratio

in future.

5.3 Recommendations

In these recent years, the shares listed in S&P 500 index have experienced major fall. The fall of

the share prices is due to some common factors like changes in the economic structure and

presence of recession in USA and other European economies of the world.

After making a detail analysis of the history of S&P 500 index starting from 1926 to 2013, it can

85

be said that except the period of recession or any major financial crisis, the performance of this

index is particularly very positive. The index needs to utilize the opportunities of business and

need to make proper and innovative restructuring of financial and operational process.

The companies running in losses need to make structural changes. The loss making listed

companies like retail sector, health care, need to perform better to turn to change losses into

profits. Mergers and acquisitions can be done to increase the level of profit. The S&P 500

indexed companies need to follow up present situations of market and act according to the

present economical situations of the USA economy. The companies listed in the S&P 500 index

should not make any sort of irrelevant monetary decision that can lead towards huge cash flow.

Huge amount of future cash flow will lead towards increasing the book value of the index and

book to market ratio will provide positive results in favour of the investors.

Development of Book to Market ratio from the perspective of the listed companies

Most of the times Book to market ratio has been able to provide positive results of returns from

the listed companies of S&P 500. It is correct that results might be negative due to some

economical factors of the entire company or the industry.

When companies are listed in an index, the returns derived are same. There are discriminations

regarding the performances of the companies listed in the index regarding profitability. But when

the profit making sectors are performing well, then the weaker industries of the index are also

getting the benefit of proper return to investors. Book to market ratio, is also very effective in

predicting market returns of the cross sectional indexes.

The problem or the area of development of book to market ratio is the ability to predict return

from the index during high risky market or during the situation when share prices are fluctuating

rapidly. This particular ratio is unable to find out appropriate book to market ratio of service

industries and for those companies that lack huge amount of physical assets. This ratio is also

unable to predict return of those companies that have merged with other company or acquired

any company.

Apart from these developments, Price to market ratio have the capability to predict positive

returns from the indexed companies.

5.4 Limitation of the research

While carrying out this research, the researcher faced some problems. As no primary data was in

86

use, the researcher had to use secondary data from various magazines, journals, and websites to

collect authentic and relevant data. Here, the data collected for research, was backdated and the

researcher had to make necessary changes and calculate values of index. The index data of S&P

500 starting from 1926 to 2013 was really difficult to interpret, so failed to provide appropriate

analysis and conclusions. The researcher did not have enough time to carry out the research

properly. There were also some problems regarding budgets for making progress in this research.

The sustained errors are still present and proper recommendation cannot be provided.

5.5 Future scope of the research

After completing this particular research, the researcher kept scope to make research on this

particular subject. There should be accurate use of Book to market ratio in future. The present

limitations of this ratio have to be minimized. The conditions of the weak industries of this index

need to make proper structuring to avoid further losses. S&P 500 index needs to sort out ways

for improving returns during the period of recession. Book to market ratio have provided

negative results many times, this needs to be more perfect considering the changes of index

prices. In future, the researchers can include both physical and non physical (Intangible assets)

assets while calculating book to market ratio. And more detailed analysis of the index starting

from 1926 can be made in a better way and approach towards more accurate results.

87

Reference list

Books

Avery, C., Chevalier, J. and Zeckhauser, R. (2011). The "CAPS" prediction system and stock

market returns. Cambridge, Mass.: National Bureau of Economic Research.

Bergh, D. and Ketchen, D. J. (2009) Research methodology in Strategy and Management, 1st ed.

Bingley: Emerald Group Publishing Ltd

Bernard, H. R. (2011) Research Methods in Anthropology: Qualitative and Quantitative

Approaches. 5th ed. Plymouth: Alta Mira Press.

Bryman, A. and Bell, E. (2011) Business Research Methodology. 3rd ed. New York: Oxford

University Press.

Burns, R. B., Burns, R. and Burns, R. P. (2008) Business Research Methods and Statistics Using

SPSS, 3rd. ed. London: Sage Publications.

Edwards, R., Magee, J. and Bassetti, W. (2013). Technical analysis of stock trends. Boca Raton:

CRC Press.

Kellermann, A., De Haan, J. and De Vries, F. (2013). Financial Supervision in the 21st Century.

Dordrecht: Springer.

Parigi, B., Pelizzon, L. and Thadden, E. (2013). Stock Market returns, corporate governance and

capital market equilibrium. Munich: CESifo.

Saunders, M. N., Lewis, P. and Thornhill, A. (2009) Research methods for business students,

Page 52, 5th ed. Harlow: Prentice Hall

Saunders, M., Lewis, P., and Thornhill, A. (2009). Research Methods for Business Students,

(6th ed.) London: Pearson

Somekh, B. and Lewin, C. (2011) Theory and Methods in Social Research, 2nd ed. London:

Sage Publications.

88

Journals

Adam, T. and Goyal, V. (2008). THE INVESTMENT OPPORTUNITY SET AND ITS PROXY

VARIABLES. Journal of Financial Research, 31(1), pp.41-63

Alaska, S. (2010). Thinking about method and practice together. International Journal of

Research & Method in Education, 29(1), pp.1-3

Amit, R. and Livnat, J. (2008). RESEARCH NOTES. DIVERSIFICATION AND THE RISK-

RETURN TRADE-OFF. Academy of Management Journal, 31(1), pp.154-166

Barber, B. and Lyon, J. (2010). Firm Size, Book-to-Market Ratio, and Security Returns: A

Holdout Sample of Financial Firms. The Journal of Finance, 52(2), p.875.

Basu, S. (2008). The conservatism principle and the asymmetric timeliness of earnings1. Journal

of Accounting and Economics, 24(1), pp.3-37

Brannen, J. (2009) ‘Prologue, mixed methods for novice researchers: reflections and themes,

International Journal of Multiple Research Approaches, 3(1), 8–12

Bryman, A. (2006) “Integrating quantitative and qualitative research: how is it done?”

Qualitative Research, 6(1), pp. 97-113

Cameron, R. (2009) 'A sequential mixed model research design: design, analytical and display

issues',International Journal of Multiple Research Approaches, 3(2), 140-152.

Cameron, R. (2009) 'A sequential mixed model research design: design, analytical and display

issues', International Journal of Multiple Research Approaches, 3(2), 140-152

Capaul, C., Rowley, I. and Sharpe, W. (2003). International Value and Growth Stock Returns.

Financial Analysts Journal, 49(1), pp.27-36

Cenesizoglu, T. (2011). Size, book-to-market ratio and macroeconomic news. Journal of

Empirical Finance, 18(2), pp.248-270

Curcio, R., Kyaw, N. and Thornton, J. (2003). Do Size, Book-to-Market, and Beta Factors

89

Explain Mutual Fund Returns?. Investing, 12(2), pp.80-86

Darner, D. (2008). Approaching design thinking research. Design Studies, 20(5), pp.407-415

Dennis, P., Perfect, S., Snow, K. and Wiles, K. (2009). The Effects of Rebalancing on Size and

Book-to-Market Ratio Portfolio Returns. Financial Analysts Journal, 51(3), pp.47-57

Ellis, T. and Levy, Y. (2009) ‘Towards a guide for novice researchers on research methodology:

Review and proposed methods’, Issues in Informing Science and Information Technology, 6,

323-337

Fama, E. and French, K. (2010). Size and Book-to-Market Factors in Earnings and Returns. The

Journal of Finance, 50(1), pp.131-155

Fama, E. and French, K. (2015). Incremental variables and the investment opportunity set.

Journal of Financial Economics

Freshwater, D. (2007) “Reading mixed methods research: contexts for criticism”, Journal of

Mixed Methods Research, 1(2), pp. 134-46

Griffin, J. and Lemmon, M. (2009). Book?to?Market Equity, Distress Risk, and Stock Returns. J

Finance, 57(5), pp.2317-2336

Gulen, H., Xing, Y. and Zhang, L. (2011). Value versus Growth: Time-Varying Expected Stock

Returns. Financial Management, 40(2), pp.381-407

Harrison, R. L. and Reilly, T. M. (2011) "Mixed methods designs in marketing

research", Qualitative Market Research: an International Journal, 14(1), pp. 7 – 26.

Harrison, R. L. and Reilly, T. M. (2011) "Mixed methods designs in marketing research",

Qualitative Market Research: an International Journal, 14(1), pp. 7 – 26

Huxham, C. and Vangen, S. (2008) Researching organizational practice through action research:

Case studies and design choices. Organizational Research Methods, 6, 383-404

Jiang, X. and Lee, B. (2007). Stock returns, dividend yield, and book-to-market ratio. Journal of

Banking & Finance, 31(2), pp.455-475

90

Jiang, Z. (2009). The Value and Research Methodology of Industrial Heritage. null, 2009(4),

pp.354-361.

Johnson, R. B., Onwuegbuzie, A. J. and Turner, L. A. (2007) “Toward a definition of mixed

methods research”, Journal of Mixed Methods Research, 1(2), pp. 112-33

Kang, Q., liu, Q. and Qi, R. (2010). Predicting Stock Market Returns with Aggregate

Discretionary Accruals. Journal of Accounting Research, p.519-620

Knox, K. (2008) A researchers’ dilemma: Philosophical and methodological pluralism,

Electronic journal of business research methods, 2(2), pp. 119- 128.

Lam, K. (2009). The relationship between size, book-to-market equity ratio, earnings–price

ratio, and return for the Hong Kong stock market. Global Finance Journal, 13(2), pp.163-179.

Lau, S., Lee, C. and McInish, T. (2009). Stock returns and beta, firms size, E/P, CF/P, book-to-

market, and sales growth: evidence from Singapore and Malaysia. Journal of Multinational

Financial Management, 12(3), pp.207-222

Liew, J. and Vassalou, M. (2009). Can Book-to-Market, Size, and Momentum Be Risk Factors

That Predict Economic Growth?. SSRN Journal

Magilvy, J. K. and Thomas, E. (2009) ‘A first qualitative project: Qualitative description design

for novice researcher’, Journal of the Society for Paediatric Nurses, vol. 14, no. 1, pp. 298-300.

Menzly, L. and Ozbas, O. (2010). Market Segmentation and Cross-predictability of Returns. The

Journal of Finance, 65(4), pp.1555-1580

Nguyen, T. and Schuessler, A. (2014). The impacts of leverage, price book ratio, dividend yield

and past performance on stock returns. IJAF, 4(4), p.341

Onwuegbuzie, A. J. and Leech, N. J. (2009) On becoming a pragmatic researcher: The

importance of combining quantitative and qualitative research methodologies. International

Journal of Social Research Methodology, 8, 375-387

Penman, S., Richardson, S. and Tuna, A. (2009.). The Book-to-Price Effect in Stock Returns:

Accounting for Leverage. SSRN Journal

91

Piotroski, J. (2007). Discussion of The Book-to-Price Effect in Stock Returns: Accounting for

Leverage. Journal of Accounting Research, 45(2), pp.469-479

Truscott, D. M., Smith, S., Thornton-Reid, F., Williams, B. and Matthews, M. (2010) “A cross-

disciplinary examination of the prevalence of mixed methods in educational research: 1995-

2005”, International Journal of Social Research Methodology, 13(4), pp. 317-28

Vargas-Hernajndez, J. (2012). Research Methodology Strategies in Strategic Management. jpair,

7(1).pp.90-92

Walford, G. (2008). Research ethical guidelines and anonymity1. International Journal of

Research & Method in Education, 28(1), pp.83-93

Yau, J. (2012). Demographic Trends, the Dividend-Price Ratio, and the Predictability of Long-

Run Stock Market Returns. CFA Digest, 42(3), pp.156-158

Zhang, X. (2013). Book-to-Market Ratio and Skewness of Stock Returns. The Accounting

Review, 88(6), pp.2213-2240

92

Appendices:

Appendix 1: Graph showing the correlation and beta of S&P 500 (1900-2010)

Appendix 2: Graph showing the credit position of S&P 500 and Hedge funds (1990-2010)

93

94