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More to the Story

In the last section, portfolios of stocks with price/volume momentum and stocks with large positive earnings surprises were constructed. With the former, you buy the stocks hoping that the price momentum will continue into the future. With the latter, your returns depend on stocks continuing to drift up after large positive earnings announcements. In this section, you will look at the weaknesses of each strategy and possible ways of reducing exposure to these weaknesses.

Risk

When constructing the two portfolios in the last section, we paid no attention to the riskiness of the stocks that went into the portfolios. To the extent that riskier stocks are more likely to show price and volume momentum, you may find your eventual portfolio to be far riskier than the market. Figure 12.12 looks at risk in two dimensions—beta and standard deviation in stock prices—and compares the firms in the high price/volume momentum portfolio with the rest of the market.


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