CFA Practice Question

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CFA Practice Question

One of the effects of survivorship bias is ______.

A. the conclusion that average return is inversely related to price-to-book ratio
B. that it allows results, which are time-specific, to be generalized
C. that companies with high returns are under-represented in samples drawn from the population
Correct Answer: A

According to Kothari, Shanken, and Sloan, survivorship bias induces researchers to conclude that average return is inversely related to price-to-book ratio.

User Contributed Comments 2

User Comment
StephanieG Not sure that this makes sense to me. Help anyone?
mtsimone Ooh, a Fama/French slam from Kothari, Shanken, and Sloan. Hadn't read this one.

Fama/French, in the early 90s, that ER on value stocks (i.e., stocks with low price/book) is higher than the ER on growth stocks, (i.e., high price/book).

Seems arcane, I know, but the bottom line is the intuition that buying low priced stocks with solid earnings, a lot of them in a portfolio, increases the odds of a higher ER than buying the same number of growth stocks. It makes sense in general, though not for any particular stock. We all look for bargains; we just have to be sure that the bargains aren't trash.

These ideas have been honed more carefully in recent years.
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