By Marc Richard Reinganum
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It is a welcome finding that the Datagraph rating was of limited significance, because the other eight filters may be computed from data that were in the public domain and not proprietary. A stock's relative strength is a potentially s i m c a n t component of the trading strategy. Relative strength entered in the strategy in three ways. First, it entered directly because only securities with relative strength ranks greater than 70 could be considered. Second, it was a factor because only the previous quarter's relative strength rankings were eligible for selection.
7 percent, a difference slightly greater than 6 percentage points. In the 1970-83 sample, this difference averaged about 14 percentage points. In the validation, the effects on the two-year excess returns of deleting the relative strength conditions were not very dramatic, for two possible reasons: (1) relative strength is not a stable component of this strategy, at least for a two-year horizon; or (2) the 1984-86 result with respect to relative strength is an outlier and does not accurately reflect the long-run influence of relative strength on investment performance.
7 percent. Nonetheless, the validation evidence suggests that the trading rule does work, even completely out of sample. The sensitivity analyses performed in the previous chapter were repeated on the 1984-86 data to investigate whether the modified trading rules applied to the validation sample exhibit changes in the same direction as observed in the original sample. The first criterion eliminated was the requirement that price/ book ratios be less than one. When this condition was relaxed, the number of buy signals jumped from 59 to 215.