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http://www.sciencedirect.com.contentproxy.phoenix.edu/science/article/pii/S0378426605002104

(Standard Deviation Used for Valuation Rates and Price Deviations)

The purpose of the study is to determine if stock prices always reflect fundamental principles, short runs or deviations from long-run equilibrium values. Can investor opinion bring about the deviation of stock prices from deeply rooted valuations causing investors not to have the ability take advantage of the price difference between markets, trading and capitalizing on the imbalance? The article reviews US stock prices deviations from fundamental principles by analyzing snapshot in time post-1870 S&P valuations averages. It considers the dynamics of different behaviors and time periods of the stock market progression. Continued occurrence of the mean implies extended price diversion from fundamental principles stemming from extended shot runs created by investor sentiment during long landmark market terms which investors experienced in the 1990s. Another finding is a reactionary response function that imitates average growth from one time new ideas which highlight sluggish adjustments. Results also show that effect of positive shocks is more prevalent in an active, aggressive business. The aim of using the standard deviation is so as to determine how much the returns have deviated from the expected normal rates (Lee, Lee, and Lee, 2010). Also, the main findings also show stock market progression (bull and bear markets) is essential in resolving deviations in valuation averages highlighting the importance of investors who make decisions regarding investing without using primary data. These behaviors create poor timing for investments fueled by overreactions to the fluctuating news in short run trading and fundamental principles in the long term. Management can use calculations, such as standard deviation, to predict market performance. Also mathematical equations are vital to the health of an organization and their effects on the various aspects of business are essential to running an organization efficiently and profitably in today’s business world.

References:

Coakley, J., & Fuertes A. M. (2006, August) Valuation ratios and price deviations form fundamentals Journal of Banking Publisher Elsevier Date 2006 Volume 30 Issue 8 Pages 2325 – 2346

Lee, C. F., Lee, A. C., & Lee, J. C. (2010). Handbook of quantitative finance and risk management. New York: Springer.