Reference no: EM133146095

Question - Sell-side analysts working for brokerages issue public buy-sell-hold recommendations about the stocks they follow. Most of the time these recommendations are in a scale of 1 to 5: strong sell, sell, hold, buy, strong buy. Using the scale, it is possible to calculate a stock's average recommendation by averaging across all analysts rating the stock.

Andrew and Ximena work for an investment management company. In a committee meeting, Andrew is recommending the purchase of stock ABC, while Ximena is recommending the purchase of stock XYZ. Both stocks are part of the Russell 3000 Index and only one stock will be purchased. To support his pitch, Andrew shows that sell-side analysts have higher average recommendations for stock ABC than for stock XYZ. The investment committee is unsure about how to evaluate Andrew's point about sell-side analysts recommentations. What is the best way for the committee to proceed regarding Andrew's point?

A) Find out whether the sell-side analysts rating stocks ABC and XYZ currently work for reputable brokerages.

B) Use backtests to check whether, on average across stocks and over time, stocks with more favorable average buy-sell-hold recommendations have relatively higher future returns than stocks with less favorable buy-sell-hold recommendations.

C) Find out how the sell-side analysts currently rating stocks ABC and XYZ rated the same stocks over the last 3 to 5 years.

D) Use backtests to check whether, on average across stocks and over time, stocks that have favorable average buy-sell-hold recommendations have had large returns prior to those recommendations.

E) Find out whether stocks that currently have favorable buy-sell-hold recommendations outperformed the market in the past.