This paper investigates the connection between the forecast precision of security analysts and the superior performance of portfolios constructed optimally on the basis of their predictions. In particular, we are interested in the threshold of predictive power that makes for a positive economic contribution of security analysts. Results can be viewed as good news for security analysts. A correlation coefficient between forecast and realized abnormal returns as low as 0.032 will render a security analyst valuable.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics