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Crunching the Numbers

How much does a stock have to go down for it to be categorized as a “loser stock”? The answer will vary, depending upon the period for which you look at the market. In a period of rising stock prices, a 40% drop in the stock price may qualify a stock to be a “loser.” However, in a period where the entire market is down 15% or 20%, a drop of 80% or more may be necessary for a stock to drop to the bottom of the scale. In this section, you will look at the distribution of returns across stocks in the market as well as significant differences in returns across sectors.

Across the Market

To identify stocks that are the worst performers in the market in any period, you have to make two judgments. The first relates to the length of the period that you will use to compute returns. The worst performers over the last year may not be the worst performers over the last six months or the last five years. The second factor that will affect your choices is what you define as the market. The worst performers in the S&P 500 may not even make the list if you were looking at the worst performers across all equity markets in the United States. In Figure 8.8, the distribution of annualized returns across all listed stocks in the United States is presented for four different periods: January through October 2002 (9 months); October 2001 to October 2002 (1 year); October 1999 to October 2002 (3 years); and October 1997 to October 2002 (5 years).


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