Date of Award


Degree Type


Degree Name

Master of Science (MS)


Economics and Finance

Committee Chair(s)

Tyler Brough


Tyler Brough


Jason Smith


Jared Delisle


In this study, the work of Basu 1977 is partly replicated using subsequent market data. A trading strategy of investing in assets based on their price-earnings ratio is back-tested, thus also testing the efficient market hypothesis. Market data over the past twenty-five years (1989-2014) was gathered, cleaned, and modeled to test for unexplained return to five portfolios ranked by PE ratio. The data was tested using the single-factor Capital Asset Pricing Model and the Fama-French three-factor model. The dataset was then decomposed by price and similarly modeled to test whether the effectiveness of using PE as a leading indicator is limited by the price level of an asset. I conclude that investing in a portfolio comprised of the lowest PE ratio assets yields the highest unexplained returns over the period examined. I also find that this strategy is primarily driven by low and mid-priced stocks, and does not hold at high price levels. In this analysis, the efficient market hypothesis does not hold.

Included in

Finance Commons